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$50 Billion Liquidation Fund is for Killing Sick Mega-Banks

April 23, 2010 - by Donny Shaw

The Republicans’ claims that the $50 billion “orderly liquidation fund” in the Restoring American Financial Security Act would “guarantee bailouts” have been pretty thoroughly debunked at this point, but I’m reading through the comments on the OpenCongress bill page and there still seems to be some confusion. For example, the highest rated comment right now is an attempt to fight back against the Republican bailout claim, but it still gets it a little wrong. “My understanding is there is a fund, funded by the banks themselves to bailout the large banks. So it doesn’t impact taxes and it just means they have to bail themselves out not the government,” the commenter writes.

That’s not quite right. There is a fund in the bill (the “orderly liquidation fund”) that would be funded by the big banks in order to keep taxpayers from being on the hook if they fail, but the fund would be used to put failing banks to death, not to bail them out. With bailouts, banks get rescued by the government and survive. Under this bill, failing banks would be executed by the government. The orderly liquidation fund would provide the working capitol the F.D.I.C. would need to carry out the complicated process of winding down big, failing banks.

One section of the bill makes the purpose of the fund particularly clear:


(a) Purpose of Orderly Liquidation Authority- It is the purpose of this title to provide the necessary authority to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard. The authority provided in this title shall be exercised in the manner that best fulfills such purpose, with the strong presumption that—

(1) creditors and shareholders will bear the losses of the financial company;

(2) management responsible for the condition of the financial company will not be retained; and

(3) the Corporation [a.k.a. the F.D.I.C.] and other appropriate agencies will take all steps necessary and appropriate to assure that all parties, including management and third parties, having responsibility for the condition of the financial company bear losses consistent with their responsibility, including actions for damages, restitution, and recoupment of compensation and other gains not compatible with such responsibility.

The ironic thing about the Republican opposition to the orderly liquidation fund, which appears to be winning at getting the Democrats to drop it, is that the costs of winding down a failing mega-bank without the fund would end up going to taxpayers. Earlier this week, the Congressional Budget Office said that the bill, as written, would reduce the deficit by $21 billion over the next ten years because the collections of finance-industry assessments into the $50 billion orderly liquidation fund would “exceed the expected cost of liquidations during the capitalization period.” That means that without the fund, taxpayers would be $29 billion in the hole.

Even worse, the CBO estimated that in at least one of the next four 10-year periods beyond 2020, the costs of winding down failing banks would exceed the income from the assessment on banks into the orderly liquidation fund by more than $5 billion. Without having a bank-paid fund in the bill, the cost of winding down failing mega-banks sounds mighty expensive. This of course begs the question: if the Republicans are opposing the orderly resolution fund and they’re opposing the bailouts, are they going to support more radical approaches, like an expected amendment to reduce the size of the big banks?

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  • JRShown 04/24/2010 6:44am


    Maybe this is overly cynically, but just a couple of days ago you were telling us how the financial reform bill contained language on auditing the fed that was essentially “meaningless”. Why is this provision any different?

    While the stated purpose of this section is to provide liquidation authority, would it surprise anyone if in a time of crisis well connected business interests and powerful politicians found a way to concoct another bailout scheme?

  • Comm_reply
    donnyshaw 04/24/2010 6:57pm

    I think there is a strong argument to be made there. When you consider that the top four banks right now hold assets worth over 50% of the GDP, it’s hard to imagine the feds letting them fail, even with the fund and the orderly resolution process. Their political and economic influence is just so huge. There is a bipartisan movement to reduce the size of the biggest banks for this reason.

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  • bootland 01/05/2012 6:02am

    Ha, 50 billion, was waaaaay too little too late in the end … :-/
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