Financial Regulation is not "an endless series of bailouts"

The GOP (primarily Senate Minority Leader Mitch McConnell) has been making the ridiculous argument that Chris Dodd's financial regulation bill will lead to "endless bailouts" of the banking industry. A couple things should lead you to believe that this is not the case.

1) The financial industry is fighting tooth and nail against the bill. Banks like being bailed out, and they particularly like it if there's a guarantee of bailouts, because it makes it much cheaper for them to borrow money (because if there's a federal guarantee that the banks won't go under, it makes loaning to them less risky, and thus they get a lower interest rate). Since the entire business model for banks like Goldman and Merrill Lynch is to borrow tons of money, and then invest it, lowering their borrowing cost with a bailout guarantee would be like the government subsidizing the cost of planes for an airline. Just as an airline would not fight those subsidies, banks would not fight a law that guaranteed bailouts.

2) Banks are pouring money into the coffers of Republicans who are fighting the bill. They would not do this if the bill guaranteed bailouts (see above).

3) The alleged $50 billion "bailout fund" is, under the bill, actually a liquidation fund that would be used to wind down failing banks, not bail them out. Ezra Klein explains:

Here's how the liquidation fund works: A year after the bill is signed, the secretary of the Treasury begins taxing banks based on the risk they pose to the financial system. This tax must raise $50 billion and last for at least five years but no more than 10 years. So first, that's where the fund comes from: a tax on too-big-to-fail banks, which has the added bonus of giving a slight advantage to smaller banks that won't be laboring under this tax.

When it comes to saving failing banks, $50 billion isn't a lot of money. Think of the $700 billion TARP fund. Or even look at the House bill, which has a $150 billion resolution fund. But then, the $50 billion isn't there to save banks. It's there to liquidate them.

Here's the chain of events: A bank is judged failing. The FDIC submits a plan for the bank's liquidation -- which includes firing management, wiping out shareholders, handing losses to creditors, and selling off the firm -- and gets it approved by the Treasury secretary. Then the FDIC takes over the banks. The $50 billion fund is used to keep the lights on while all this happens. It's there to prevent taxpayers from having to foot the bill for the chaos that will occur between when we recognize a bank is failing and when we shut it down.

Whatever you want to call this, it isn't a bailout. It's the death of the company. And the fund is way of forcing too-big-to-fail banks to pay for the execution.

Unfortunately, the Republican leadership in congress has been making a lot of headway confusing voters on this issue, so it looks like the Administration may cave and drop the liquidation fund. Dropping the liquidation fund (which would be raised by taxing banks) is Wall Street's preferred position, and that's what Republicans are pushing.