Ex Ante Resolution Fund

Unhappy that the administration threw this under the bus to shut up McConnell. Treasury never wanted it, but it was a good idea. Now the FDIC is supposed wait until there's an industry that's experiencing a crisis, and has already suffered losses to a failed financial firm, before trying to recoup losses from resolving the failed firm. Nice plan.

Economics of Contempt says that the Street's pressure against the resolution fund stems, in part, the fact that "the majority of the $50 billion would come directly out of the major dealer banks' profits over the next few years." And he's right. But there's something else worth noting here. A big reason, I would say the primary reason, is that by killing the pre-funding mechanism, the financial firms pretty much ensure that the resolution mechanism will be less likely to be utilized. FDIC can't take apart a company if it has no cash to do it - this isn't like an ordinary bank failure where another bank will buy the failed company whole. If the FDIC requires a loan from Treasury to do the resolution, it adds one more layer of dithering before the resolution can happen, not to mention the endless debate about whether the country can afford it in the midst of a deepening financial crisis. (Right, this isn't going to be happening during boom times, after all). More debate = lower probability of action = greater likelihood of a regular bailout.

The point of the whole exercise is to take crappy firms apart, to fire management, to give a haircut to the bondholders, etc. But by eliminating the ex-ante resolution fund, Congress makes it all the more likely that the Fed and Treasury will do the math, and maybe even cook the books to make it look cheaper to keep the failing firm afloat than to take it apart. After all, exigent circumstances and all that.