Financial Services Regulatory Reform Update - May 6, 2011

After a two-week recess, Congress, the Senate and this update are back, having returned to a very different world then when they left. Although initially it seemed that the assassination of Osama Bin Laden may have been the type of game changing event that would have altered the political calculus on a whole host of issues, including the debt ceiling and deficit reduction, it instead appears that the triumphant mission only quieted the rhetoric briefly and will not have any substantive impact on congressional politics.

The House and Senate reconvened this week for an unusually long 14-week stretch during which at least one chamber will in session, as there will be no combined congressional recess for either of the early summer holidays. Perhaps this grueling schedule is why this past week was a relatively quiet one in Washington, with much of the action taking place on the sidelines, i.e., committee rooms, through the media, and in the case of the Gang of Six in back rooms out of sight from the public. However, the debt ceiling and the intertwining issue of deficit reduction continue to dominate the discussion in Washington. However, there are some Republicans who are arguing that there are alternatives to the binary choice of raising the debt limit vs. financial catastrophe that Geithner and economists have conveyed. In fact, even though Treasury Secretary Timothy Geithner and others have sent strong warnings to Congress about the grave consequences of defaulting on U.S. debt, a number of prominent Republican legislators are expressing their skepticism that this is anything more than a tactic to increase spending. Sen. Pat Toomey (R-PA), Sen. Jim DeMint (R-SC), Rep. Joe Walsh (R-IL) and others have retorted that Geithner’s rhetoric is nothing more than “debt limit hysteria” and fear-mongering. For these Republicans, the other option that needs to be on the table is for the U.S. debt bondholders to be paid with tax revenues that will stream into the Treasury regardless of the debt limit. As a result, under this plan other government programs (e.g., federal employees’ paychecks, defense contracting work, highway maintenance etc.), which normally is funded by tax revenues, can instead be delayed or cut entirely without panicking markets or causing a major financial crisis.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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