One of the aspects of Senator Dodd’s proposed reforms is the “Orderly Liquidation Fund”. This fund is to be targetted to be $50 billion dollars and will be pre-funded out of bank profits.
The target size of the Fund shall be $50 billion, adjusted on a periodic basis for inflation. The FDIC shall impose assessments as provided in subsection (o) to capitalize the Fund and reach the target size during an “initial capitalization period” – of not less than 5 years or greater than 10 years from the date of enactment.
My fear is that this fund will create a false sense of security and will be seen by the creditors to these financial institutions as a way to recover at the very least their initial investment or part of their initial investment. As such, it will do little to prevent excessive risk taking which is, in a nut shell, what got us into the mess we find ourselves in currently.
The other problem is the puny nature of the fund. If we have more than one firm fail like we had with the recent crisis the costs are well over $1 trillion dollars, or 20x the size of this fund. It wont be enough to deal with a crisis of the nature that we recently went through. As such, the proposed legislation fails at its own purpose,
Ends Too Big to Fail: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
The legislation might reduce the chances of their being a financial crisis of the size we’ve just had, but it does not eliminate it. As such, it does not end the possibility of taxpayers having to step in and bailout the creditors of these large financial institutions.
