[TheMercenary]

Derivatives and what may have been a better approach...

Time to put the brakes on big business bailouts

By one estimate, nearly half of derivative transactions could still remain outside public exchanges — unrestrained by the rules such exchanges would impose.

That was a setback, and it wasn’t the only one. House members approved provisions that would provide government backing for bank debt — an implicit pledge of future bailouts — if a “liquidity event” threatens to “destabilize the financial system.”

This pledge could encourage large institutions to take more risks in the belief their obligations would be backed up by the taxpayer. That’s not the direction financial reform should take.

In fact, the bailout mentality that infects Washington seems unabated. As Congress debates financial reform, the rest of the government is taking steps that will substantially increase taxpayer liability.

The Treasury recently eliminated the $400 billion cap on how much tax money could be shoveled into Fannie Mae and Freddie Mac. Meanwhile, the Federal Housing Administration is extending taxpayer guarantees to dubious, low-down-payment loans, increasing the risk that this agency, like Fannie and Freddie, will also be forced to seek a bailout.

Regulatory agencies have a role to play in assessing risk, but tougher borrowing standards should be woven more deeply into the regulatory reform effort. Risk assessment will always be imperfect, but a system with less debt and more capital will be better prepared to weather a crisis.

http://www.kansascity.com/340/story/1662381.html