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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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