Home -> Law Blog Directory -> Legal Commentary Blogs -> Economics of Contempt

Legal Commentary

: Economics of Contempt

Republican Opposition to the Orderly Liquidation Fund

By Anonymous

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. With a pre-funded resolution fund, you lose the ability to tailor financial institutions' respective contributions to the fund based on how much they benefited from the resolution of a large bank, or how culpable they were in causing the bank to fail. For instance, with a post-funded resolution fund, we could make JP Morgan and Citi pay for a larger share of the cost of Lehman's failure, based on the conclusions in the Examiner's Report. Pre-funding obviously forces the banks to internalize the costs upfront, but it sacrifices the ability to tailor the costs of a bank failure.)

Full post as published by Economics of Contempt on April 20, 2010 (boomark / email).