Now that Senate Republicans have allowed the financial reform debate to begin, what demands will they have for a bipartisan compromise? Until this week, there were only several vague notions of changes they wanted. Reports included concern with the resolution fund, a push for less aggressive rules for derivatives, and a desire for the prudential regulator to overrule the consumer protection agency. But through the leak of the summary of their financial reform alternative, we can gather a little more specificity of the kinds of changes Republicans might call for.
No Resolution Fund
The Republicans intend to eliminate the $50 billion resolution fund which would be paid for proactively by large financial institutions to cover costs in winding down big firms that fail. But until the Republican alternative was leaked, we didn't know how Republicans wanted the resolution authority to cover resolution costs without the fund. Now we know that they want to do this through loans to creditors to be paid back through after bankruptcy proceedings end.
As mentioned yesterday, this is a strange idea, as it could result in a taxpayer bailout if creditors end up not being able to pay back those loans. You can certainly imagine a situation where Lehman got a loan due to the Bear Sterns failure, for example, and defaulted on it. Alternatively, the Republicans might settle for after-the-fact assessments on financial firms to pay for any shortfall. This also seems a poor alternative, however, since the financial firms who didn't fail would be forced to pay for the poor performance of their competitors.