Rep. Barney Frank (D-MA) is expected to reveal legislation (possibly today) creating a “resolution authority,” which would enable the government to negotiate an orderly unwinding of large, complex financial firms like AIG, Citigroup, or Lehman Brothers.
The banking industry has already begun to criticize the proposal and Republicans have taken to characterizing it as enshrining taxpayer-funded “bailouts.” Last night, Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services Committee, and CNBC’s Larry Kudlow went so far as to call resolution authority “TARP in perpetuity,” and “permanent bailout authority”:
KUDLOW: It’ll perpetuate TARP, in perpetuity. TARP will be used to somehow string these institutions along. Is that right, is that fair, is that your question? […]
BACHUS: It’s a permanent bailout authority.
While it makes sense, politically, to invoke the unpopular TARP to oppose anything that the administration is proposing, Kudlow and Bachus are pretty far off the mark. In fact, resolution authority is meant to ensure that the government doesn’t find itself, as it did last year, having to choose between letting a company’s disorderly collapse ripple through the economy or infusing that company with money to prop it up, indefinitely.
And contrary to Kudlow’s positing, the resolution money will not come from TARP. That said, there is a legitimate question of how it will be raised, and Frank and the administration were looking at two options to find the answer.
The first was having the largest banks pay into an insurance fund that would be used in the event of a failure that required resolution. The second, which Frank and Treasury have reportedly settled on, is having Treasury loan the failing institution money, which will then be recouped from the company’s assets and from a fee on other large institutions, after the fact.
Unfortunately, I think Frank and the administration have this backwards. We already have a system in which the Federal Deposit Insurance Corp. assesses fees on banks, which it uses to pay depositors when an institution fails. I don’t see why a similar system wouldn’t work to build a fund for resolution authority.
The big banks are going to cry foul either way, but at least if they had to pay into a fund, it’d be simple to say that the fee was meant to guard taxpayers against any of them failing. Collecting fees post-failure means that one firm will have to pay for the mistakes of another, directly, with some undetermined formula for how much each institution should pay.
Simon Johnson, professor at MIT Sloan School of Management, said that charging banks after the fact was “a non-starter,” while Rep. Brad Sherman (D-CA) said that “the only way he could vote for the bill would be if it had large insurance premiums levied on the biggest banks.” Indeed, framing the fee as insurance, instead of forcing banks that didn’t fail to pay a penalty, seems like the better way to go.