No one is better than Peter Wallison at explaining what a disaster Dodd-Frank is. Here, he shows how the expanded liquidation authority the law grants the Treasury Department can actually make things worse.
. . . Instead of bankruptcy, the Treasury secretary assumes control of the firm and hands it over to the FDIC. Will that be any less of a market shock? In both cases, creditors will run if they suspect a bankruptcy or a government takeover is near, and after the seizure — again as in the Lehman case — they will run from other firms if conditions in the market are the same as those in 2008. So the liquidation authority is no better than bankruptcy in preventing chaos after a large firm fails.
But it is worse than bankruptcy because it has no rules subject to legal oversight. Secured creditors don’t know in advance whether they will be repaid and, in contrast to bankruptcy, the creditors have no say in whether the firm is liquidated or recapitalized by turning their debt into equity. Under the FDIC plan, the government makes this decision, picking winners and losers. Politics will hover in the background. The uncertainties inherent in the liquidation authority will make credit more expensive for all financial firms of any size. [Emph. added]
By the way, Dodd-Frank gives the government the authority to seize any financial institution if it thinks its failure risked destabilizing the entire system. It’s not even clear to me how that can be constitutional. I can easily see how it can be politically abused, though. . . .