Ezra has a great interview with Sen. Mark Warner, one of the architects of the Dodd bill and also a generally pretty smart guy. Warner defends the resolution authority concept, but I’m not sure he gets at the core objection that Papagianis and others have raised.

“Resolution,” Warner continued, “will be so painful for any company. No rational management team would ever choose resolution. It means shareholders wiped out. Management wiped out. Your firm is going away. At least in bankruptcy, there was some chance that some of your equity would’ve been retained and you could come out in some form on the other side of the process. The resolution that Corker and I have tried to create means the death of the company. The institution is gone.” Another element of the Republican critique concerns the $50 billion “orderly liquidation fund” that the FDIC will raise by taxing the banks. The idea of this fund is to create holdover money so the bank doesn’t collapse while regulators are trying to unwind it. Sen. Richard Shelby, the ranking Republican on the Banking Committee, called it a “slush fund” and said that “the mere existence of this fund will make it all too easy to choose a bailout over bankruptcy.”

“Again,” says Warner, “it’s either that they don’t understand or they choose not to understand. There’s nobody in the financial sector who believes this. They’d laugh at the proposition that $50 billion is enough to get you through the resolution process if a couple of firms go down. What we’ve heard time and again is that the challenge in a crisis is to buy enough time to keep the lights on for a few days till you get the FDIC in here. You could make it smaller. Corker and I spoke about $25 billion. But this is funded by the industry.”

“And here’s the hypocrisy of the Republican leader’s comments,” continues Warner. “I can guarantee you that if there had not been some pre-funding, the critique would’ve been: ‘Look at these guys! They’ve left the taxpayers exposed! What’s going to keep the lights on for these few days? It’s going to be Treasury funds or Federal Reserve funds. The taxpayer will be exposed!’ ”

I don’t understand these issues nearly as well as Warner, I’m sure. But it’s not obvious to me that we’ve solved the moral hazard problem here. Yes, resolution will be terrible. No one wants to go down that road. But isn’t the issue how investors will respond to the prospect of being made whole if a TBTF bank does indeed go bust, as Papagianis maintains?

This is why the proposal that Hart-Zingales advances is so much more attractive: it reduces — though it certainly doesn’t eliminate — regulatory discretion, thus providing clear rules for investors while limiting implicit subsidies. As modified by Papagianis, regulatory discretion is further limited.

This strikes me as pretty important given the revolving door between Wall Street and Capitol Hill that the NYT’s indispensable Eric Lichtblau recently described.

An analysis by Public Citizen found that at least 70 former members of Congress were lobbying for Wall Street and the financial services sector last year, including two former Senate majority leaders (Trent Lott and Bob Dole), two former House majority leaders (Richard A. Gephardt and Dick Armey) and a former House speaker (J. Dennis Hastert). In addition to the lawmakers, data from the Center for Responsive Politics counted 56 former Congressional aides on the Senate or House banking committees who went on to use their expertise to lobby for the financial sector.

Let me stress that this is a very complex space and there are many strong, reasonable arguments. I certainly don’t think congressional Republicans have covered themselves with glory here, and I intend to write more about that. But I think the back-and-forth between Team Warner-Corker against Team Shelby-McConnell is less important than actually getting the policy right. And it’s looks to me like we might be paving the way to a more unstable financial system by creating merger incentives, etc.