Saturday's Wall Street Journal writes "A Permanent Backstop Would Be Permanent Pain", which says, "Imagine your delight if the government was suddenly prepared to guarantee all your debts. That's more or less what U.S. politicians are offering banks in legislation designed to fix the financial sector. That lawmakers are pushing a debt backstop, despite the moral-hazard risk, reveals their concerns about the ability of banks to borrow through an economic downturn. That's understandable. In the latest crisis, many firms could have failed without the Federal Reserve's emergency credit lines and the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, or TLGP." It adds, "The details of the backstop beggar belief. The bill passed by the House says that if a 'liquidity event' occurs that could 'destabilize the financial system,' regulators and the Treasury can widely offer the guarantee. The bill stipulates that the guarantee can only go to 'solvent' institutions, but its definition of solvency -- having more assets than obligations to creditors -- could let just about anyone in." We're unsure what exactly the House legislation says (and what the final legislation will say), but we expect the President's Working Group report to weigh in on the topic of a backstop too any day now too.
