Where Is the Money Being Spent?--The CBO Scores HR 4173

Yesterday we looked at the CBO score card for HR 4173--The Restoring American Financial Stability Act. According to the CBO, HR 4173 will cause a net increase to the deficit of $19.7 billion over the 2011-2020 period. Today we will look at where that money is going to be spent.

According to the CBO's report, which can be viewed by going to www.cbo.gov, most of the cost of the bill will occur as a result of the cost of the orderly liquidation program. As you may recall, in May we wrote about the program which allows the Secretary of the Treasury to identify financial institutions which may be in danger of failing and take them before a panel of judges which are appointed by the Chief Justice of the U.S. Bankruptcy Court. If the judges decide that the Treasury Secretary has proven his case, they can order immediate dissolution of the firm. The firm can appeal but they cannot remain open pending appeal. The CBO estimates that the cost of the Orderly Liquidation Authority alone will increase the deficit by $20.3 billion from 2011-2020, but this deficit spending will be offset by a $4.9 billion increase in revenues from fees.

Why so expensive? The bill gives the FDIC the authority to take steps to liquidate endangered firms through organizing bridge banks which would be exempt from federal and state taxes. The FDIC will borrow funds from the Treasury to finance the creation of these banks. Any borrowed sums are to be repaid with interest through assessments on bank holding companies and financial firms. "Although the estimate reflects CBO's best judgment on the basis of historical experience, the cost of the program is inherently unpredictable...it might take several years, for example, to recoup the funds spent to liquidate a complex financial institution. As a result, some of the proceeds from asset sales or cost recovery fees related to financial problems emerging in any 10-year period might be collected beyond that point. All told, actual spending and assessments in each year would probably vary significantly from the estimated amounts--either higher or lower than the expected value estimate provided for each year."

The reason that it is hard to come up with a firm number is that the CBO acknowledges that if the Orderly Liquidation Authority has to liquidate a large firm, the costs will be huge. CBO estimates that the costs of liquidating large firms through 2020 will be as much as $26.3 billion and that $6 billion of that will be recovered through assessments.

On a brighter note, the new regulatory authority issued to the SEC, which will give them permanent authority to collect and spend fees, is projected to decrease deficits by $4.9 billion from 2011-2020. Most of that figure--$4.3 billion--will be unavailable to the agency for spending.

Since this fee collection will be permanent rather than subject to annual appropriations, the collections will become part of the SEC's budget. The SEC will be authorized to collect fees sufficient to maintain its annual operating expenses and to retain a reserve of 25% of the following year's budget. However, since the CBO estimates that the SEC will need to add 800 new jobs over the next few years in order to meet all of its regulatory authority, we can look for their budget to increase. "The reduction in budget deficits from changes in direct spending and revenues would probably be accompanied by increases in discretionary spending."

Another money pit will be the Bureau of Consumer Financial Protection which will exist as an independent regulatory authority within the Financial Reserve. The Board of Governors of the Federal Reserve will fund the Bureau through earnings from the Federal Reserve, at a rate of 10% in 2011, increasing to 12% in 2013. If the Bureau's expenditures are reported in the federal budget as direct spending--as the CBO recommends--creating and maintaining the Bureau will cost $4.5 billion over the 2011-2020 period. The CBO estimates that the Federal Reserve will transfer 515 jobs to the Bureau of Consumer Financial Protection--which will ultimately be responsible for making that payroll. All told, the CBO estimates the the Bureau of Consumer Financial Protection will contribute $3.2 billion to the deficit during 2011-2020 period.

The bill creates a Federal Insurance Office within the treasury department to coordinate federal policy on insurance issues. This department will cost $9 million from 2011-2015.

Finally the bill creates a huge new entitlement to provide access to traditional banking services for those people who are currently using payday loans, non bank money orders, check cashing businesses and rent to own agreements. HR 4173 will subsidize access to banking services for these people who have traditionally been considered a poor credit risk at a cost of $248 million from the 2011-2015 period.

Tomorrow we will talk about the costs to the private sector.