The Senate Banking Financial Institutions Subcommittee today convened its long-awaited hearing on the GAO’s final study of the extent to which the largest U.S. banks still enjoy a TBTF subsidy. This report follows our initial one on the GAO’s findings (see Client Report TBTF18), which focused on the details of GAO’s report. Although Sen. Toomey (R-PA) described these as “inconclusive,” Subcommittee Chair Brown (D-OH) and Sen. Vitter (R-LA) read the report as clearly demonstrating a significant subsidy that would be as much as $130 billion under renewed financial-market stress. Several witnesses strongly criticized the GAO report, arguing that it mis-defined both TBTF and “subsidy.” GAO defended its methodology, although debate continued on the utility of tracking bond pricing and the challenges of using options-pricing methodologies. In our view, the critical fight resulting from GAO’s report is now not specific efforts to recapture the subsidy – the lack of a conclusive number makes this very challenging – but rather over the extent to which the orderly-liquidation regime resolves TBTF.
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