Bob Corker and Resolution Authority: Is Financial Reform a Recipe for Bailouts?

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Senate Minority Leader Mitch McConnell came out in vociferous opposition to the current financial reform bill on Tuesday, arguing the legislation “institutionalizes… endless taxpayer-funded bailouts” that will ultimately allow the failed giants of Wall Street to escape accountability.

McConnell’s criticism comes at a pivotal time for the legislation; the ink is still drying on the Democrats’ massive health care overhaul, wounds from the bitter partisan fight that produced that bill are still fresh, and the midterm election season is just beginning to heat up. Senate Banking Committee Chairman Chris Dodd introduced his version of a financial reform bill in March, but was unable to secure any Republican support before unceremoniously voting it out of committee after just 22 minutes of mark-up. As the bill heads to the floor to be amended and debated, McConnell has drawn clear battle lines. But his oppositional charge may clash with the work of one of his own caucus members.

Along with Virginia Democrat Mark Warner, GOP Senator Bob Corker of Tennessee helped craft the “resolution authority,” a measure in the bill that deals with the fate of “too big to fail” institutions. In a phone interview Wednesday, Corker was adamant that the proposed legislation offers an opportunity to close faltering financial institution down, not prop them up.

“The central element of our bill is that if you failed, you went through an orderly liquidation,” Corker said. “The default mechanism is bankruptcy.”

The legislation gives the Federal Deposit Insurance Corporation authority — once the proper channels have been followed — to seize a failing financial firm that poses systemic risk, fire management and dismantle the company piece by piece.

“The FDIC comes in and they begin selling off assets,” Corker explained. “But in order to do that, they have to value those assets. And that takes a bit of time.”

This is where government funds come into play. The FDIC needs working capital while they evaluate and sell off assets at the insolvent firm, “money to keep the lights on” as Corker calls it. Under the proposed legislation, this money would come from a pool fed by a tax on the largest banks, $50 billion in total, available before a risk to the system rears its head.

The amount of “pre-funding” for such operating costs has been the topic of much debate – McConnell said “no one honestly thinks $50 billion would be enough” and the House bill establishes a fund of $150 billion — but Corker says the size of the fund is largely unimportant.

“It is unlikely,” Corker told me, “after selling off assets that there would ever be a shortfall.” Not only can the FDIC use the $50 billion to cover costs, but it can also borrow money from the Treasury Department up to the total estimated value of assets at the failed firm. As the FDIC continues to liquidate assets, the government is first in line to be paid back, and the $50 billion “pre-funding” pot is refilled by the same big bank tax that established it in the first place.

Corker said the system is designed to only put financial industry money — whether “pre-funded” by the resolution fund or “post-funded” by asset sales — on the line.

“It is absolutely not constructed to be a bailout fund.“ Corker told me. “It is constructed to protect taxpayers.”

Corker’s explanation of the system he helped design appears somewhat at odds with McConnell’s characterization of the bill as a whole. If the resolution authority succeeds at closing down “too big to fail” firms on Wall Street’s dime, then it does not perpetuate “endless taxpayer-funded bailouts.”

“It’s fair,” Corker simply said of McConnell’s critique, citing “vast numbers of loopholes” that might prevent the resolution authority from functioning as intended. And he says the wider bill still has flaws: Requiring banks that securitize loans to carry part of the risk doesn’t adequately address bad underwriting practices in his view.

Corker sounded optimistic nonetheless. “My sense is that we can fix it fairly easily,” he said. (He has a list of 14 problems relating to the resolution authority yet to be addressed with FDIC, Treasury and Chairman Dodd, but declined to share the details — “I think it’s best not to negotiate in public.”)

When pressed on the minority leader’s characterization, Corker was quick to bemoan a larger trend of oversimplified discourse.

“I have cautioned our caucus from hyperbole,” he told me. “It’s an intellectual lift to work your way through [the bill]…. Unfortunately it gets debated in pretty broad statements.”

Regardless of any sweeping assertions made about the legislation, Corker insists “the broad concept” of the resolution authority he sketched out with Warner holds: “It absolutely ends too big to fail.”