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Tuesday, April 20, 2010

"Republican Opposition to the Orderly Liquidation Fund"

Economics of Contempt is annoyed. And there's good reason to be annoyed (at the very least):

Republican Opposition to the Orderly Liquidation Fund, by Economics of Contempt: The thing that annoys me most about Republicans' new-found opposition to the $50bn orderly liquidation fund is that they are, without question, doing Wall Street's bidding on this.

Killing a "pre-funded" resolution fund — which would be used to help pay for resolutions under the new resolution authority — is the Street's #1 issue in financial reform. That might seem a bit strange at first, until you realize that the majority of the $50 billion would come directly out of the major dealer banks' profits over the next few years. (Never underestimate the Street's ability to be short-sighted.) This issue has been at the top of the Street's wish list since last summer, when Barney Frank started suggesting that the House bill might include a pre-funded resolution fund.

The funny thing is, the Street had been having a very hard time getting traction on this issue. They lost the battle over pre-funding in the House, whose financial reform bill did end up including a "Systemic Dissolution Fund" (the size of which was left to the FDIC's discretion, which means it definitely would be larger than $50bn). They were also having a hard time getting any traction in the Senate — Dodd wanted a pre-funded resolution fund, the administration had signed off on pre-funding, and Warner and Corker appeared to have agreed on a $50bn resolution fund as part of their compromise on the resolution authority.

Enter Mitch McConnell. As soon as McConnell started loudly calling the $50bn pre-funded resolution fund a "bailout fund," and made opposition to it a Republican litmus test, everyone started distancing themselves from the idea. And now a pre-funded resolution fund is all but dead. Amazing.

Now, I think it's pretty clear from my record that I'm about as far from being a Wall Street/Washington conspiracy theorist as you can get. But in this case, what I honestly believe happened is that when McConnell and John Cornyn had their infamous meeting with a group of Wall Street executives a couple weeks ago, McConnell and Cornyn asked what their #1 issue in financial reform was, and after being told it was pre-funding the resolution authority, McConnell and Cornyn basically promised to kill it. It was, after all, a fundraising meeting, and McConnell and Cornyn are desperate to raise money for November.

The Street's problem, apparently, was that it had been trying to make the case for a post-funded resolution authority on the merits. McConnell didn't want to deal with all that "logic" hocus-pocus, so he decided to just start straight-up lying about the resolution fund. And it worked. Ah, politics.

(To be fair, there's a reasonable case to be made on both sides of this issue. ... Pre-funding obviously forces the banks to internalize the costs upfront, but it sacrifices the ability to tailor the costs of a bank failure.)

    Posted by on Tuesday, April 20, 2010 at 02:07 AM in Economics, Financial System, Politics, Regulation | Permalink  Comments (14)


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