Frank changes mind, now favors pre-funding
From Alison Vekshin:
Barney Frank, chairman of the U.S. House Financial Services Committee, reversed course and will support requiring financial firms to prepay into a fund the government will use to unwind large firms after they fail.
If Frank’s legislation passes, there will be an explicit taxpayer guarantee backing the high risk activities of the big banks.
Why? Because there’s no way banks could fund the cost of even one systemic resolution. How much has AIG set back taxpayers? $182 billion so far. And we’ve promised $200 billion each for Fannie and Freddie. Banks complained about the $5.6 billion special assessment on FDIC. We expect them to pre-fund sufficient scarol to fund the next AIG?
David Reilly made this point very cogently a couple days ago.
Will creditors and shareholders actually have to absorb meaningful losses? As reader Ralph DG points out the creditors and counterparties of the banks are … other banks and insurance companies, systemically-important themselves.
Losses can’t be forced on them without causing the kind of systemic “domino effect” this whole scheme is trying to prevent.
Bottom line: when the bill comes due, taxpayers will pay it.
In the meantime, banks will benefit from their new protected status.