Demint Falsely Claims Financial Reform Creates A ‘Slush Fund’ For Banks That Are ‘Too Important To Close’

Now that the Senate Banking Committee has passed financial regulatory reform legislation — with Republicans deciding to offer all of their amendments before the full chamber, instead of during committee markup — more senators are crawling out of the woodwork to express their thoughts on the bill. Today, it’s Sen. Jim DeMint’s (R-SC) turn, as he penned a Politico op-ed criticizing what he sees as the bill’s “runaway regulation.”

Not surprisingly, DeMint adopted GOP pollster Frank Luntz’s tactic, which is to portray regulatory reform as benefiting big banks and leading to more bailouts, regardless of what the legislation actually says. And amidst the usual, thoroughly debunked, conservative tropes about Fannie Mae and Freddie Mac causing the financial crisis, DeMint made this strange claim:

The bill institutionalizes the concept of “too big to fail” by taxing banks that the Treasury, the Fed and Federal Deposit Insurance Corporation says are too important to close. The money will create a $50-billion bailout slush fund that can be used to rescue them if needed. This essentially creates a circle of protection around big banks — a significant advantage over smaller banks and credit unions.

This is an odd mish-mash of conservative talking points, but let’s try to break it down. For starters, DeMint manages to claim that placing a tax on “too big to fail” banks somehow gives them a competitive advantage over smaller, untaxed banks. Last I checked, having to pay higher taxes than your competitors was a disadvantage, but DeMint seems to think otherwise.


Next, DeMint claims that the tax will go towards creating a “slush fund” that will be used to “rescue” banks that are “too important to close.” But Dodd’s legislation is explicit that the fund can only be used to liquidate a failed firm, and “not for the purpose of preserving the covered financial company.” It’s not that these banks are “too important to close,” it’s that they’re too interconnected to fall apart without bringing the entire system down with them.

The “slush fund” will actually ensure that its the banks themselves, not the taxpayers, who have to ante up to unwind a failed firm. CNBC’s Larry Kudlow — who is a big fan of DeMint — agrees on that front, as does Sen. Bob Corker (R-TN). Not singling out “too big to fail” banks for special treatment, including higher fees and more stringent standards, means either endorsing breaking them up or suffering through another Great Depression when they implode.

DeMint’s prescription, it seems, is to simply plug his ears and pretend that “too big to fail” banks don’t pose a threat to the economy. But as David Min pointed out, “whether the government acknowledges ‘too big to fail’ or disavows it as a nonexistent problem is irrelevant. As long as large financial institutions can single-handedly implode the U.S. economy by going insolvent, they will be seen as enjoying a de facto government backstop.” And that’s why a credible process for unwinding them, regardless of size, is necessary to secure the financial system.