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Fallout: The Financial Crisis

Why Republicans say reform is a bailout

Marketplace Staff Apr 14, 2010
Fallout: The Financial Crisis

Why Republicans say reform is a bailout

Marketplace Staff Apr 14, 2010


TESS VIGELAND: It is the 14th day of April. T-minus one for your 1040s. President Obama plowed full speed ahead on financial reform efforts today. He met with Congressional leaders about a bill in the Senate. Republican minority leader Mitch McConnell was not impressed.

SEN. MITCH McConnell: This is a big complicated subject, another massive bill, that we believe in its current form, provides an endless taxpayer bailout of Wall Street firms.

Republicans have started characterizing the Wall Street reform bill as a bailout. Its Democratic sponsors say the whole point is to end bailouts. So which is it?

We asked Brett Neely to find out.

BRETT NEELY: Democrats and Republicans are really arguing over how to let big banks go bankrupt. No such procedure exists right now.

Democratic Senator Mark Warner of Virginia helped draft that part of the bill. He says the bill doesn’t reward bankers’ mistakes.

SEN. MARK WARNER: Because it means they’re gonna lose their jobs. They’re gonna have their shareholders wiped out. We’re gonna let the firm fail.

But fail in an orderly fashion, unlike Lehman Brothers or Bear Stearns.

The bill makes big banks pay a total of $50 billion into a kind of insurance fund to cushion a bank’s collapse.

Maya MacGuineas runs the fiscal policy program at the New America Foundation.

MAYA MACGUINEAS: When financial companies fail, it spreads through the whole economy, and you want to avoid that.

Senator Warner said $50 billion won’t be enough in a big crisis. But he said lawmakers compromised with banks that complained any fund would hurt their profits.

The Republicans call the bill a bailout because the government would eventually have to turn to taxpayers in a big enough crisis.

Bankruptcy expert David Skeel at the University of Pennsylvania says there’s another risk in creating a fund. It could fuel risk-taking among big banks if they know a kind of insurance fund exists at all.

DAVID SKEEL: That has the effect of reinforcing this idea that there are two kinds of institutions. There are the normal institutions and the too-big-to-fail institutions.

Skeel says in a crisis, the insurance fund may get used up.

But he says if taxpayers ultimately have to bail out the banks, the government should just present them with the total tab.

In Washington, I’m Brett Neely for Marketplace.

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