On Bank "Bailouts"

This is for the Wall Street-suspicious left, the paranoiac and ill-informed Tea Party right, and Republican Misinformation Production Engineers. Ezra Klein, as usual, has a good, concise summary:

Here's how the liquidation fund works: A year after the bill is signed, the secretary of the Treasury begins taxing banks based on the risk they pose to the financial system. This tax must raise $50 billion and last for at least five years but no more than 10 years. So first, that's where the fund comes from: a tax on too-big-to-fail banks, which has the added bonus of giving a slight advantage to smaller banks that won't be laboring under this tax.

When it comes to saving failing banks, $50 billion isn't a lot of money. Think of the $700 billion TARP fund. Or even look at the House bill, which has a $150 billion resolution fund. But then, the $50 billion isn't there to save banks. It's there to liquidate them.

Here's the chain of events: A bank is judged failing. The FDIC submits a plan for the bank's liquidation -- which includes firing management, wiping out shareholders, handing losses to creditors, and selling off the firm -- and gets it approved by the Treasury secretary. Then the FDIC takes over the banks. The $50 billion fund is used to keep the lights on while all this happens. It's there to prevent taxpayers from having to foot the bill for the chaos that will occur between when we recognize a bank is failing and when we shut it down.

Whatever you want to call this, it isn't a bailout. It's the death of the company. And the fund is way of forcing too-big-to-fail banks to pay for the execution. But stung by Republican criticisms, the administration is telling Democrats to let the fund go. And they're not all that unhappy to see it die. "The fund isn’t a priority for the Obama administration," reported Business Week, "which instead proposed having the financial industry repay the government for the cost of disassembling a failed firm, an approach preferred by the industry."

So let's just be clear: The alternative to the liquidation fund is Wall Street's preference...

The only question... was whether you pre-fund by taxing the banks, which is what the Republican head of the FDIC wants and the bill does, or whether you post-fund by recouping taxpayer losses after the fact, which the Treasury Department and the industry prefer. That -- and not bailouts -- is the debate.