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Without the Liquidation Fund, the Financial Reform Bill Adds to the Deficit

April 28, 2010 - by Donny Shaw

If the pre-funded “orderly liquidation fund” is dropped, the financial reform bill will increase the deficit, not reduce it. According to This morning’s Congress Daily ($), Banking Committee Chairman Sen. Christopher Dodd [D, CT] and Ranking Member Sen. Richard Shelby [R, AL] are close to an agreement on dropping the fund, which Republicans have been attacking as a “sluch fund” that “guarantees” future bailouts. In reality, the fund would be used to pay for liquidating (a.k.a. killing) failing mega-banks, not bailing them out.

The fund would be made up of assessments on “systemically significant” financial firms. Last week, the Congressional Budget Office said that these assessments would make the financial reform bill a net reduction of $21 billion on the deficit. Not surprisingly, removing it would mean no deficit reduction. From the Congress Daily article:

[Dodd] said one hurdle is a new CBO score that finds the bill with a $17 billion deficit without the fund. With the fund, it generates $21 billion in revenue, Dodd said.

If the pre-funded fund is removed, the bill would probably be rewritten so that the big banks have to pay the government back for the costs associated with a big-bank failure. That’s the plan supported by the Obama Administration, the Republicans and the financial industry. But it’s easy to imagine the federal government reneging on that kind of arrangement when faced with a situation where one of the big (too-big-to-fail) banks is failing. As we saw in the 2008 crisis, when one big bank fails, the whole financial sector suffers. Will they really want to put the additional financial stress of paying for the failure of one of their competitors on the other big banks?

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Comments

  • moattorney 04/29/2010 4:39pm

    I can’t think of a principled reason to oppose the pre-funded fund. Which makes me think the Repubs continue to oppose it so they don’t have to admit that calling it a “bailout fund” was either a lie, or ignorance.

    The idea that they could pass a law to just declare “We won’t bail anyone out ever again” is ridiculous. They’d have to pass a constitutional amendment to ban it, otherwise, future congresses, staring into the possibility that the entire financial system may fall into an abyss and take the whole economy with it, are going to be in the same position as G Bush and Paulson in Oct 2008. you’ll never have a bigger free market fundamentalist than Paulson & if he pulled the trigger & said lets bail them out, then any other treasury secretary is going to do the same thing.
    TARP took an act of congress. Any bill passed now can be repealed when the fit hits the shan in the next financial meltdown. Its not worth the paper its written on.
    REGULATE THE HECK OUT OF THE BANKS.

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