Talking point foolery: Proposed bank ‘bailout fund’ is really an ‘execution fund’

At the end of last week, the Obama administration reportedly told Senate Democrats to drop the $50 billion liquidation fund — often referred to as a “bailout fund” — from the financial regulation bill as a concession to Republicans. The proposed deal: drop the fund and win GOP support. Senate Democrats took the the plan to Republican leaders, who didn’t take the deal. Instead they made up some phony talking points about the “bailout fund.”

Senate Minority Leader Mitch McConnell (Ky.) made the “bailout fund” the centerpiece of his argument against financial regulation reform on CNN’s State of the Union with Candy Crowley.

The “bailout fund” is no “bailout fund.”

The idea is that banks themselves, not taxpayers, would fund a $50 billion pool. If any of the nation’s major banks were to get into the kind of stumbling trouble they were in last year, government regulators would fire every single member of management, wipe out shareholders, split the company up and sell the pieces, tapping the $50 billion fund to pay for the process and ensure the orderly dissolution of the firm. That’s very strong incentive not to fail. Companies like Citigroup were given taxpayer bailouts during the crisis. If this plan were to go into effect, failing banks, no matter how big, would not be bailed out, they would be executed (or, as Sen. Mark Warner (D-Va.) likes to say, they would face a “death panel“).

Still, McConnell has made the fund a central talking point. Does he not understand the proposed legislation? The political calculation is clear: At least for now, Republicans believe that they are better off arguing the present bill is not good enough rather than voting in favor of reform, no matter how cynical that might seem.

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