One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are.  But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion:  all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out.  This is certainly what taxpayers have learned the hard way and investors have come to expect.  Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls.  Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law?  In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out how to deploy OLA.  Given the prospect of severe contagion risk and little chance of federal intervention short of a bailout, what did FSOC say should be done?

Other than the “monitoring” and “inter-agency cooperation” that are bywords of not having pretty much anything else to recommend, the Council lays out a series of statutory changes it and everyone else knows it won’t get in what’s left of this Congress and, most likely, the next.

The most substantive of these statutory changes goes back to bailout, recommending a new federal liquidity backstop FSOC argues is much like the FDIC.  Maybe the proposed approach is in at least some ways like the FDIC and maybe not – the Council report is scant on details, especially when it comes to the prudential and consumer-protection rules it says should be mandated in concert with the new federal insurance fund.

But, even if the standards FSOC proposes accompany a taxpayer backstop approximate those imposed on banks, FSOC misses a critical point:  the FDIC is supposed to backstop depositors, not banks.  That the FDIC doesn’t do its job and protect only the small depositors initially and continually cited by law and its wards is another topic, but the FDIC is by law supposed to protect those who cannot protect themselves.

Does this hold true for FSOC’s NBMC “liquidity fund?”  As far as one can tell, the Council’s new backstop doesn’t protect borrowers – it’s for NBMCs themselves and thus for their investors.  In short, it’s a bailout no matter what premiums NBMCs might pay for the privilege.

Who’s next for taxpayer backstops when FSOC sees systemic risk?  SEC Chair Gensler last Thursday said that he thinks private credit could prove systemic – shall we create a new fund for the private-equity firms now using regulatory arbitrage to amass positions that increasingly rival bank corporate loans?  Who would benefit?  The investors fueling this spree?  Following the yellow brick road laid out time after time and mapped out yet again for NBMCs, private-credit investors are absolutely right to enjoy high-risk returns without fear of meaningful loss.

I’ll stop where I started:  I’m not saying that NBMCs are necessarily systemic.  I’m saying that, if FSOC thinks they are, then it’s charged by law to do something about them other than asking Congress to come up with another bailout backstop it knows it won’t get ahead of any of the calamities it fears.

Congress didn’t create FSOC to come up with new ways to put taxpayer money behind high-risk finance.  As Brookings’ Aaron Klein said, nothing – not NBMCs or even the nation’s largest banks, hedge funds or insurers – is as dangerous as a market that thrives on moral hazard.  FSOC was created by Congress to restore market discipline even if it had to come the hard way.  So much for all that.