There will be no more bailouts of financial institutions, a top official of the Obama administration says in what appears to be an attempt to pre-empt Republican efforts to water down the Dodd-Frank Act.

“No financial institution, regardless of its size, will be bailed out by taxpayers again,” Mary J. Miller, U.S. Treasury under secretary for domestic finance, said at a financial conference in New York on April 18.

Miller's unequivocal comments appear aimed at removing one of the hammers being wielded by Republicans against the Obama administration.

Specifically, it appeared to respond to comments April 12 by Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, that too-big-to-fail must be ended. He said in remarks at the Center for Capital Markets Competitiveness that the Dodd-Frank Act codified too big to fail with two provisions.

He said the first is Title II, providing for an orderly liquidation authority; and the second is allowing the Financial Stability Oversight Council (FSOC) to designate financial firms as systemically important financial institutions (SIFI).

Becoming a SIFI is a double-edged sword, he said, since, while the firm is subjected to enhanced regulation, the designation implies a federal bailout.

Hensarling said that the House Financial Services Committee will take up legislation to repeal Title II and the provisions authorizing FSOC to designate SIFIs.

Hensarling's comments are consistent with the concerns of many insurers, who fear that SIFI is the nose under the camel's tent for federal regulation, and such a designation would provide a competitive advantage for insurers so designated.

But Miller, without mentioning Hensarling by name, appeared to categorically reject his theories.

“Shareholders of failed companies will be wiped out; creditors will absorb losses; culpable management will not be retained and may have their compensation clawed back; and any remaining costs associated with liquidating the company must be recovered from disposition of the company's assets and, if necessary, from assessments on the financial sector, not taxpayers,” Miller said.

Other facts appear to contradict the argument that being designated a SIFI gave large financial firms an advantage over their smaller counterparts, Miller added.

“Following enactment of [Dodd-Frank], the rating agencies indicated that they would monitor the impact of financial reform implementation on the largest financial companies and adjust their ratings as appropriate,” Miller said.

Since then, she said, the rating agencies have removed as much as six notches of uplift attributable to expectations of government support.

One rating agency has also recently indicated it may further reduce or eliminate its remaining ratings uplift assumptions by the end of 2013, Miller said.

“So, to the extent the largest financial companies have been benefiting from a funding advantage based on their ratings—that uplift has been declining and appears to be continuing to go away as implementation of [Dodd-Frank] progresses,” Miller said.

She added, “If investors still perceived large bank holding companies as too big to fail, we would expect to see low credit default swap spreads with little variation between the largest companies.

“However, compared to their pre-crisis baseline, the credit default swap spreads for the largest bank holding companies have not only increased on an absolute basis but investors have also increasingly distinguished between the largest bank holding companies as measured by the variance in their spreads.”

Miller said credit default swap spreads for these companies have recently been declining.

“The evidence on both sides of the argument is mixed and complicated, making it hard to attribute the existence or absence of a funding cost advantage to any single factor, including a market perception of a too-big-to-fail subsidy,” Miller said. “It is important to acknowledge the difficulty of making these assessments and to be cautious about drawing conclusions in either direction.”

Miller said Treasury and other regulators “must continue to work hard to reduce the risks posed by large financial companies and keep putting in place the measures to wind such companies down with minimal impact on the rest of the economy if the need arises.”

This work, she said, “is making our financial system safer and a stronger, more reliable engine for providing credit to help our economy grow.”

Special Reports /

Treasury Undersecretary: No More Bailouts, Regardless of Size

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