Is McConnell right about TBTF?

April 14, 2010

Senate Republican leader Mitch McConnell charges that the Dodd financial reform bill supported by the WH fails to end Too Big To Fail. Is he correct. Well, this bit from Reuters highlights one problem area:

Seeking a middle ground between bailout and bankruptcy, the Senate bill sets up a new process for “orderly liquidation” of large firms that get into trouble. Authorities could seize distressed firms and dismantle them. The Senate bill creates a $50 billion fund to finance such actions. Large firms with assets above $50 billion would pay into the fund. Republicans object to a part of the bill that would let the fund borrow additional money from the Treasury — that means taxpayers — if the liquidation fund runs short. This provision smells like “backdoor bailouts,” say Republicans. … The House bill, like the Senate’s, sets up a new liquidation process, but it would be simpler to invoke and and it would come with a higher price-tag. The House proposes a $200-billion fund. Firms with assets over $50 billion would pay up to $150 billion into the fund, which could borrow another $50 billion from the Treasury.

Me: Then there is the issue of confidence in regulators and politicians to resist the temptation to bail/rescue in a crisis.

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