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Dodd-Frank?s Dangers and the Case for a Systemic Emergency Insurance Fund

By Harvard Law School Program on Corporate Governance

In light of the liquidation strategy for failing financial firms set forth in Dodd-Frank, I have now posted a revised version of a forthcoming article calling for a ?Systemic Emergency Insurance Fund? to augment the FDIC?s resolution authority. This version, co-authored with Chris Muller, is entitled Confronting Financial Crisis: Dodd-Frank?s Dangers and the Case for a Systemic Emergency Insurance Fund; the paper has been accepted for publication in the Yale Journal on Regulation in Winter 2011.

The paper frames its case for a ?Systemic Emergency Insurance Fund? in contrast to the seriously flawed, even dangerously flawed, approach of Dodd-Frank. In the next financial crisis the likely outcome will be serial receiverships imposed on many of the largest financial firms, a nationalization of much of the US financial sector. Apart from disruption to the real economy, this strategy is likely to increase the incidence of financial crises and will dangerously destabilize world financial markets. These are strong claims, but argument flows directly from the decision in Dodd-Frank to make an FDIC receivership the exclusive mechanism of providing support to troubled financial firms, stripping away much of the Fed?s and FDIC?s prior authority to provide systemic support in a financial crisis. Having entrusted the regulators with enormous discretion in the implementation of Dodd-Frank, the legislation withdraws that trust at the moment of systemic emergency, in the name of eliminating bailouts and stamping out moral hazard.

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Full post as published by The Harvard Law School Corporate Governance Blog on August 28, 2010 (boomark / email).