The Corner

A Twist in the FinReg Debate

The Obama administration has introduced a twist into the debate over the Dodd financial-regulation bill, which the Senate is slated to debate this week. Our editorial today argues that removing the $50 billion resolution fund, as the administration reportedly wants Senate Democrats to do, would not solve the underlying problems with the bill:

The administration’s proposal, far from being a capitulation, actually gives it everything it wants. It removes a political liability (the “bailout fund”) while preserving a loophole-ridden resolution authority. Instead of being pre-funded and capped at $50 billion, the resolution authority would now be funded by after-the-fact assessments on the financial industry. In other words, a failing firm’s erstwhile competitors would be saddled with funding a bailout that the failing firm itself did not pay into. This would give the government even more leverage in arranging shotgun marriages and coercing Wall Street firms to bail out each other. The government’s new pitch would essentially be: Pay now or pay later.

Senate Republicans should oppose the bill until the bailout loopholes are closed. This strategy carries some political risk — the administration might claim it offered a huge concession and paint continuing Republican opposition as a sign that the GOP was never really interested in negotiating — but dealing with that risk should not prove impossible. Democrats are pushing a bill that, as written, would allow the administration to keep engineering the kind of politically skewed bailouts the public loathes. Republicans should take the opposite side of that trade.

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