Protecting taxpayers from bank bailouts: It's a long way from law


While reports today indicate that GMAC is in talks for a third round of bailout money from the government, Congress and the Treasury Department finally developed draft legislation to make sure that "the taxpayers are never again called upon to take responsibility for Wall Street's business decisions." At least that's what they say in a press release announcing the draft legislation to address systemic risk for "too big too fail" institutions.

We can only believe those words when we see the final version of the bill that passes Congress. As I've previously written, the bill does give the federal government the right to seize control of troubled financial institutions that are deemed "too big to fail," fire their top executives, wipe out shareholders and rewrite the institution's loan agreements, but I suspect that won't last through the legislative process. It's too drastic a change from current bankruptcy law, and you can be certain that bondholders and other interested parties will quickly tone it down.