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WILMARTH 4/1/2011 1:11 PM 1016 OREGON LAW REVIEW [Vol. 89, 951 nonbank SIFIs and large BHCs. 274 The bill reported by the Senate Committee on Banking, Housing, and Urban Affairs would also have established a pre-funded OLF, albeit with a smaller “target size” of $50 billion. 275 FDIC Chairman Sheila Bair strongly championed the concept of a pre-funded OLF. 276 However, Senate Republicans repeatedly blocked consideration of the bill on the Senate floor until Senate Democrats agreed to remove the pre-funding provision. 277 Republican legislators denounced the pre-funding provision as a “permanent taxpayer bailout” fund, even though the fund would have been paid for by LCFIs and would therefore have provided at least partial protection to taxpayers. The Obama Administration never supported the pre-funding mechanism and eventually urged Senate leaders to remove it from the bill. 278 During the House-Senate conference committee’s deliberations on 274 See Mike Ferrulo et al., Regulatory Reform: House Clears Regulatory Reform Package Calling for New Controls on Financial Sector, 93 Banking Rep. (BNA) 1167 (Dec. 15, 2009). 275 S. REP.NO. 111-176, at 4, 5, 63–64 (2010). 276 Id. at 5, 5 n.10; see also Statement by FDIC Chairman Sheila C. Bair on the Causes and Current State of the Financial Crisis, Before the Financial Crisis Inquiry Commission (Jan. 14, 2010) [hereinafter Bair FCIC Testimony], at 38–39 (supporting establishment of a pre-funded OLF), available at http://www.fcic.gov/hearings/pdfs/2010-0114-Bair.pdf. 277 Alison Vekshin & James Rowley, Senate Republicans Vow to Amend Finance Bill on Floor (Update 1), BLOOMBERG BUSINESSWEEK (Apr. 29, 2010), http://www .businessweek.com/news/2010-04-29/senate-republicans-vow-to-amend-finance-bill-on -floor-update1-.html (reporting that “[o]n three previous votes this week, the [Senate’s] 41 Republicans united to block consideration of the bill” until Republicans “got assurances that Democrats would remove from the bill a $50 billion industry-supported fund that would be used to wind down failing firms”). 278 Finance-Overhaul Bill Would Reshape Wall Street, Washington, BLOOMBERG BUSINESSWEEK (May 21, 2010), http://www.businessweek.com/news/2010-05-21 /finance-overhaul-bill-would-reshape-wall-street-washington.html (reporting that the Senate committee’s proposal for “a $50 billion [resolution] fund, paid for by the financial industry,” was removed from the Senate bill in order “to allow debate on the bill to begin” after “[b]ank lobbyists opposed the fund, and Republicans argued that the provision would create a permanent taxpayer bailout of Wall Street banks”); Stacy Kaper, Democrats Soften Stand on $50B Resolution Fund, AM. BANKER, April 20, 2010, at 3 (noting the claim of Republican Senate leader Mitch McConnell that his opposition to the $50 billion fund was “vindicated by President Obama’s request to remove it”); David M. Herszenhorn & Sheryl Gay Stolberg, White House and Democrats Join to Press Case on Financial Controls, N.Y. TIMES, April 15, 2010, at B1 (reporting that “[t]he Obama administration has not supported the creation of the $50 billion fund” and citing Senator McConnell’s claim that the fund would “encourage bailouts”); see also infra note 284 and accompanying text (explaining that removal of the pre-funded OLF from Dodd-Frank was widely viewed as a significant victory for LCFIs).
WILMARTH 4/1/2011 1:11 PM 2011] The Dodd-Frank Act 1017 Dodd-Frank, House Democratic conferees tried to revive the prefunding mechanism, but their efforts failed. 279 It is contrary to customary insurance principles to establish an OLF that is funded only after a SIFI fails and must be liquidated. 280 When commentators have considered analogous insurance issues created by the DIF, they have recognized that moral hazard is reduced when banks pay risk-based premiums that compel “each bank [to] bear the cost of its own risk-taking.” 281 In stark contrast to the FDI Act (which requires banks to pre-fund the DIF), Dodd-Frank does not require SIFIs to pay risk-based premiums to pre-fund the OLF. As a result, SIFIs will derive implicit subsidies from the protection their creditors expect to receive from the OLF, and SIFIs will pay nothing for those subsidies until the first SIFI fails. 282 When reporters asked Republican Senate leader Mitch McConnell why big banks were opposing a pre-funded OLF if the fund actually benefited them by “guarantee[ing] future bailouts,” he had no response. 283 The true answer, of course, was that SIFIs did not wish to pay for the implicit benefits they expected to receive from a postfunded OLF. SIFIs had good reason to anticipate that a post-funded OLF, backed by the Treasury and ultimately by the taxpayers, would be viewed by creditors as an implicit subsidy for SIFIs and would 279 R. Christian Bruce & Mike Ferullo, Regulatory Reform: Oversight Council Still a Sticking Point as Bank Reform Conference Plows Ahead, 94 Banking Rep. (BNA) 1227 (June 22, 2010); Alison Vekshin, House Backs Off Reserve Fund for Unwinding Failed Companies, BLOOMBERG BUSINESSWEEK (June 23, 2010), http://www.businessweek.com /news/2010-06-23/house-backs-off-reserve-fund-for-unwinding-failed-companies.html; see also House-Senate Conference Committee Holds a Meeting on the Wall Street Reform and Consumer Protection Act, Financial Markets Regulatory Wire, June 17, 2010 [hereinafter Conference Committee Transcript] (transcript of deliberations of House- Senate conference committee on Dodd-Frank on June 17, 2010, during which House Democratic conferees voted to propose a restoration of a pre-funded OLF with $150 billion of assessments to be paid by LCFIs). 280 See CARNELL ET AL., supra note 118, at 535 (noting that ordinarily “an insurer collects, pools, and invests policyholders’ premiums and draws on that pool to pay policyholders’ claims”). 281 Id. at 328. 282 See Wilmarth, supra note 6, at 763 (contending that “a post-funded SRIF would not be successful in eliminating many of the implicit subsidies (and associated moral hazard) that our current TBTF policy has created”); Conference Committee Transcript, supra note 279 (remarks of Rep. Guttierez, arguing that a post-funded OLF would create “moral hazard” by “allowing [large financial institutions] to act and not be responsible for their actions by contributing to a fund which dissolves the riskiest of them”). 283 Herszenhorn & Stolberg, supra note 278 (reporting on a press conference with Sen. McConnell).
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