The GOP’s Wall Street budget gimmick

Vowing to focus exclusively on spending cuts in the next budget battle, Republicans may once again turn to the Wall Street reform law to extract savings.

The House GOP has repeatedly tried to repeal a major provision in Dodd-Frank that gives the FDIC the authority to liquidate financial firms that are falling apart and pose a risk to the entire financial system. But while getting rid of this new authority produces some upfront savings, American Banker explains, repeal might not do anything to reduce the deficit in the long-term — and it could risk increasing it.

(Simon Dawson - BLOOMBERG)

(Simon Dawson - Bloomberg)

The Dodd-Frank provision is meant to prevent "Too Big to Fail" from happening again by giving the government robust authority to unwind failing banks, thus preventing future taxpayer-funded bailouts. Republicans have hated the provision from the start, arguing that it would actually increase the dependence of banks on taxpayer dollars. Rep. Paul Ryan included the repeal of liquidation authority in his 2013 budget, and House Speaker John Boehner attached the spending cut to his failed Plan B to resolve the fiscal cliff. The American Banker flags a Congressional Budget Office report last year that calculates that repeal would save the government about $22.6 billion over 10 years.

The problem is, the CBO's 10-year budget estimate is an incomplete picture of the fiscal impact of the provision. If and when a major institution did fail farther down the road, the government is likely to recoup all of the money spent through fees imposed on the failing institution (a.k.a the "receivership"), the CBO explains:

As receiver, the FDIC would liquidate the company in an orderly manner with the goal of minimizing both losses to the receivership and disruption to the financial system. Any losses incurred by the receivership, including administrative costs, would be recouped through proceeds from asset sales and assessments on large bank holding companies and other nonbank financial companies supervised by the Federal Reserve.  

So while the CBO estimated that orderly liquidation will cost the government $22.6 billion between 2012 and 2022, it also adds that "the remainder of the costs would be recovered after 2022." What's more, the GOP hasn't proposed replacing the liquidation authority with anything else: We'd go back to the status quo in terms of failing banks, risking larger deficits through taxpayer-funded bailouts in the long term. “I don’t understand how they get the savings,” Karen Shaw Petrou of Federal Financial Analytics told the National Journal in December. “The way the law was enacted, financial institutions have to pay back anything that is ever borrowed.”

All this weakens the argument for repealing this part of Dodd-Frank as a reliable way to reduce the deficit. But certainly, Republicans don't have a monopoly on budget gimmicks: Democrats have also been willing to resort to similar measures that achieve short-term savings that potentially increase the deficit in the long term. In fact, that's the fundamental fiscal problem with the Roth 401(k) provision that got inserted into the final "fiscal cliff" deal that passed with strong support from the White House and Congressional Democrats.

So there may still be strong interest from the GOP in supporting partial repeal. Republicans haven't committed to including the repeal measure in their upcoming budget resolution, but Rep. Jeb Hensarling, the new chair of the House Financial Services Committee, recently blasted the provision in his vision statement for the committee's agenda. And a growing number of conservatives say they want to find new ways to fight "Too Big to Fail" — not just by undoing this part of Dodd-Frank, but also by breaking up big banks themselves, as George Will came out to support Monday.

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