More troubling analysis of Senate financial bill

New disturbing features of the so-called "Reforming American Financial Stability Act of 2010" continue to come to light.

The Wall Street Journal today cites Vanguard Chief Investment Officer Gus Sauter's concerns about a provision of the bill that he feels would enable the FDIC to play favorites among bondholders of a corporation undergoing resolution (see "Vanguard's Bailout Warning"). The actual powers proposed in the bill can be found in the Senate bill linked above, in sections 202 through 210, beginning at page 115.

This strikes us as an ominous development and one which should discourage investors from lending any capital to corporations which the federal government could decide are "systemically important."

Of course, if you are the Chief Investment Officer of a firm that advocates "indexing" as Vanguard does, you do not have the luxury of being selective with the companies to which you give capital. (We have explained some of the reasons we do not advocate indexing in previous posts such as this one, and the argument we made in yesterday's post that investors should seek growth whether they are investing in stocks or bonds also points out the problems with the "just index" approach).

While we do not advocate indexing, we are in complete agreement with Mr. Sauter that this aspect of the proposed bill is very dangerous.

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