GOP Alternative Financial Reform Plan Proves Its ‘Permanent Bailout’ Meme Was Nonsense

For months now, Republicans have been mischaracterizing Sen. Chris Dodd’s (D-CT) financial regulatory reform bill as inevitably leading to “permanent bailouts,” institutionalizing the notion that some banks are “too big to fail.” For instance, Sen. Mitch McConnell (R-KY) said that Dodd’s bill means “a perpetual taxpayer bailout of Wall Street banks,” while Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services, said that it “would make AIG style bailouts permanent.” This strategy came right out of a memo penned by GOP pollster Frank Luntz, who said that the best way to defeat financial reform is to play on the public’s distaste for further bailouts.

Yesterday, for the second consecutive day, Republicans — along with Sen. Ben Nelson (D-NE) — prevented Dodd’s bill from coming to the Senate floor. But in an effort to look like they are doing something more than obstruct, they released their own “alternative” to the Dodd bill, as well. And interestingly enough, Republicans either also want to implement permanent bailouts, or they are acknowledging that their meme was complete bunk, as their alternative mirrors Dodd’s language when it comes to unwinding failing financial firms:

Title I of the Republican alternative will establish a resolution mechanism for the orderly winding-dawn and liquidation of financial companies. The resolution mechanism will provide a process for winding-down financial companies with minimal impact on the financial system while ensuring that failed firms are liquidated and creditors and shareholders bear all the losses of the failed firm and the costs of its resolution.

There are some minor tweaks that the Republicans have made, such as having the D.C. courts, rather than a panel of bankruptcy judges, give the go-ahead for a resolution. The GOP also did away with the $50 billion fund, built up through assessments on the biggest financial firms, that would be tapped in order to facilitate a firm’s dismantling. (In that way, the GOP plan resembles the Treasury Department’s original resolution authority proposal.) Otherwise, the Republican alternative looks just like Dodd’s.


This basically proves that the GOP’s opposition has been hot air aimed at currying favor with Wall Street, rather than actual policy differences. And in that regard, the lockstep opposition has been paying off, as for the first time since 2004, Wall Street is giving more money to Republicans than Democrats.

Though the differences aren’t huge, doing away with the $50 billion fund is, I think, an unwise move. In fact, the fund should be larger, closer to the $250 billion that the House originally proposed. The reason for this is simple. If one large financial institution is going under, chances are that others aren’t in good shape, and having to find other places to raise revenue can be dangerously pro-cyclical. As FDIC Chairman Sheila Bair has said, a pre-funded system “has significant advantages over an ex post funded system.” And in fact, a majority of Americans in a new Washington Post-ABC News poll favor a pre-funded mechanism for dismantling failed banks.