Fact Checking The Sunday Shows - April 25, 2010

Fox News Sunday

CLAIM: Sen. Mitch McConnell Repeated His False Claim That The Financial Reform Bill Includes A "Bailout Fund."

SEN. MITCH McCONNELL: "This bill needs to be improved. The $50 billion bailout fund needs to come out."

FACT: The Dodd bill would not bail out failing financial firms -- it would liquidate them.

PolitiFact: The Bill Would "Completely Shut Down" Failing Financial Institutions. Responding to Sen. Mitch McConnell's accusation that the $50 billion fund in the Dodd bill would lead to future bailouts, Politifact wrote:

The official name of that part of the bill is "Orderly Resolution Authority." It sets up a panel of three bankruptcy judges who convene and agree within 24 hours about whether a large financial company is insolvent. If a "systematically significant" firm is teetering on collapse, the Treasury, the Federal Deposit Insurance Corp. and the Federal Reserve would have to agree to liquidate the firm, using a special fund created with payments from the largest financial firms. The FDIC "shall impose assessments on a graduated basis, with financial companies having greater assets being assessed at a higher rate," according to the legislation.

We should clarify that there will be no change for small, mid-sized and even fairly large banks. When they're in trouble, there's already a well-established mechanism, under FDIC authority, that is not considered a bailout.

Instead, the "bailouts" at issue are those for the small number of very large, highly interconnected institutions -- those sometimes called "too big to fail" because their collapse would severely impact the rest of the economy.

The legislative language says that the money must be used to dissolve -- meaning completely shut down -- failing firms. Here's what Sec. 206 of the bill says:

"In taking action under this title, the (FDIC) shall determine that such action is necessary for purposes of the financial stability of the United States, and not for the purpose of preserving the covered financial company; ensure that the shareholders of a covered financial company do not receive payment until after all other claims and the Fund are fully paid; ensure that unsecured creditors bear losses in accordance with the priority of claim provisions in section 210; ensure that management responsible for the failed condition of the covered financial company is removed (if such management has not already been removed at the time at which the FDIC is appointed receiver); and not take an equity interest in or become a shareholder of any covered financial company or any covered subsidiary." [PolitiFact.com, accessed 4/25/10]

Bush-Appointed FDIC Chair Said Wall Street Reform Will Make Bailouts "Impossible." In an interview with American Banker, FDIC chairman Sheila Bair said, "The status quo is bailouts. That's what we have now. If you don't do anything, you are going to keep having bailouts. Bankruptcy doesn't work - we saw that with Lehman Brothers.... [This bill] makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can't bail out an individual institution - you just can't do it. In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support - lending and debt guarantees - but even then, a default would trigger resolution or bankruptcy." [American Banker, 4/15/10]

WSJ: Senate Bill "Would Make A Government Bailout Virtually Impossible." As reported by the Wall Street Journal: "A spokeswoman for the Connecticut Democrat said Friday he would change a provision that would have allowed the Federal Reserve to use emergency powers to lend to an individual 'financial market utility.' Only payment and clearing firms deemed 'systemically important' by a proposed council of regulators would have been eligible.... The change Mr. Dodd has agreed to would make a government bailout virtually impossible, though the government would be able to seize and dismantle failing firms." [Wall Street Journal via Factiva, 3/19/10]

Kudlow: "Dodd's Financial-Regulation Proposal Raises The Possibility Of Substantial Progress On The Road To Ending 'Too Big To Fail' (TBTF) And Bailout Nation." In a column written for RealClearMarkets, Larry Kudlow wrote, "Sen. Chris Dodd's financial-regulation proposal raises the possibility of substantial progress on the road to ending 'too big to fail' (TBTF) and bailout nation for banks and other financial institutions... First, under the Dodd scheme, large complex companies will have to submit plans for rapid and orderly shutdowns should they go under. These are called 'funeral plans.' Then, in terms of these orderly shutdowns, the bill would create an 'orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.' Good." [Kudlow, RealClearMarkets, 3/16/10]

Washington Post: "The Bill Provides A Way To Rein In The Risks They Take With That Money, And Taxpayers Won't Be On The Hook If They Nevertheless Collapse." In an editorial written after the Senate released its plan to reform the financial system, the Washington Post wrote, "Like the House bill, it would authorize a council of regulators to name systemically risky institutions, limit their leverage and require them to pay into a $50 billion resolution fund that would deal with a big firm's collapse. To be sure, listing 'too big to fail' institutions only encourages the market to offer them artificially easy funding. But at least the bill provides a way to rein in the risks they take with that money, and taxpayers won't be on the hook if they nevertheless collapse." [Washington Post, 3/18/10]