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Andrew Ross Sorkin in SO Wrong about Starr v. Board

posted by Adam Levitin

Andrew Ross Sorkin is waiving his arms about the Starr v. Board of Governors ruling being the "end of bailouts." And he is SO wrong.  Sorkin writes that "Legal experts say that the ruling, coupled with certain provisions of the Dodd-Frank financial overhaul law enacted after the crisis, makes it unlikely the government would ever rescue a failing institution, even if an intervention was warranted." 

I don't know which "legal experts" Sorkin is referring to (not least as he doesn't name any), but anyone who has imbibed the slightest draught of legal realism will recognize that bailouts are never constrained by law. The prime directive in a financial crisis, as Anna Gelpern has taught us, is to prevent the ship from sinking.  All other concerns--legality, moral hazard, expense, etc.--are jettisoned the moment they get in the way. Afterwards there's inevitable finger waging and cases like Starr, but whenever there's trouble again, we'll be right back at it. Put another way, the Fed is not Superman, but Batman. It will break the rules to protect Gotham, no matter what.  And that's probably the way we want it deep down.  

So what does Starr mean? The ruling is a justly deserved embarrassment for the Fed. There were a lot of ugly details that emerged during the trial that Sorkin doesn't want to mention, but in the end, the case really doesn't matter when one looks at the big picture. It is going to have ZERO effect on future bailouts. So Sorkin and others can be outraged that the mighty Fed was called to task for the imperious way it conducted the bailouts, but this judicial tonguelashing is just that and nothing more. 

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