Finance

A $50 Billion Fund For Failing Finance Firms

Some day, the Senate will finally unveil its big finance-reform bill. Until then, we'll have to survive on the endless stream of leaks about what's likely to be in it.

Like, for example, the $50 billion trust fund that may be created to wind down big, failing financial institutions. The proposed pool, described in this WSJ story, would come from fees levied on financial firms.

In the current system, there's no good way to deal with big financial institutions that are about to go bankrupt and don't fall under the umbrella of the FDIC, which oversees some banks. Exhibits A and B for why this is a problem are Lehman Brothers, whose bankruptcy sent the economy into panic, and AIG, which received a gargantuan government bailout.

Of course, the Treasury and the Fed put more than $100 billion into the AIG bailout alone — which makes a $50 billion safety fund look a bit paltry. But the Senate bill would also allow the government to collect more fees after a bailout, if $50 billion didn't cover it.

The trust fund would be paid for by financial firms so big or so interconnected that their failure would pose broad risks to the economy. Under the Senate proposal, the Fed would decide which firms fit that description, Bloomberg News reports, and the FDIC would wind down big firms that are about to fail.

The finance-reform bill the House passed late last year would create an even bigger fund — — up to $150 billion — to deal with failing firms.

We'll have more about the finance-reform bill on Friday's podcast.

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