Prepaid fund to cover future financial collapses nixed

Senators working to complete a sweeping overhaul of financial regulations rejected a push by House lawmakers to set up a $150-billion fund — endowed by large financial institutions — to cover costs should any falter in the future and need to be seized to prevent a threat to the economy.

Thursday’s move most likely kills the prepaid fund as a feature of the final package as members of a House and Senate conference committee reconcile two different versions of the legislation.

The House included the fund in its version of the overhaul passed in December. But it became a flashpoint in the Senate debate over the legislation this spring, with Republicans labeling it a bailout fund.

Senate Democrats had proposed a smaller version of the so-called resolution fund — $50 billion — but abandoned it to overcome Republican objections that were blocking the bill. The Obama administration also opposed the prepaid fund.

Instead, the Senate bill requires any costs paid by the government in seizing a teetering firm be repaid after the fact. Both bills would collect money from financial firms with more than $50 billion in assets.

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said the Senate could not accept the prepaid fund, adding that money collected later still would “ensure that taxpayers would not lose a penny.”

House Democrats strongly supported having large firms pay into a fund in advance to prevent the type of taxpayer exposure caused by the bailouts of American International Group Inc. and other firms during the financial crisis.

The Federal Deposit Insurance Corp., which under the legislation would dismantle seized companies the same way it now does with banks, would have to borrow money from the Treasury Department under the Senate proposal. The agency then would recoup the money through a levy on large financial institutions.

“To fund [it] after the fact means that taxpayers have to pony up alone in the midst of a crisis in hopes companies will pay them back when the crisis subsides,” said Rep. Gregory W. Meeks (D-N.Y.).

In addition, he said, a seized firm would not have to pay into the fund, as it would were the fund prepaid.

“Making the good kids clean up the mess of the wild kids isn’t fair in school and isn’t fair on Wall Street either,” he said.

House Republicans strongly opposed the fund, regardless of when the money was collected. They pushed unsuccessfully to replace the legislation’s proposed resolution authority with enhanced bankruptcy procedures to save taxpayers any potential costs.

“The American people, they don’t want this,” Rep. Spencer Bachus (R-Ala.) said. “They’re tired of the government lending money to failing companies.”

jim.puzzanghera@latimes.com