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Bill Drops Fund to Shut Failed Banks

Edward Wyatt and David M. Herszenhorn
Wednesday, 5 May 2010 | 8:51 AM ET

WASHINGTON — Leaders of the Senate Banking Committee said Tuesday that they had reached an agreement to limit the likelihood that big banks would be bailed out by taxpayers. But liberal Democrats said they also would push aggressively for an array of proposals that could force some of the nation’s biggest banks to reduce their size.

US Capitol Building
US Capitol Building

The tentative agreement to limit the chances of future bailouts came as the Senate delayed for another day its initial votes on amendments to legislation to address the causes of the 2008 financial crisis.

Aides to the committee chairman, Christopher J. Dodd, Democrat of Connecticut, and the panel’s senior Republican, Richard C. Shelby of Alabama, said the two senators had agreed to scuttle a $50 billion fund proposed by Democrats.

The fund, which was opposed by the Obama administration, drew criticism from Republicans who had warned that it would promote rather than prevent taxpayer bailouts of failed financial companies.

Under the deal, the Federal Deposit Insurance Corporation would finance the liquidation of failed financial companies, using a new credit line with the Treasury Department backed by the failed company’s assets. The money would be recouped later through the sale of assets, with shareholders and creditors forced to take losses.

Mr. Dodd said he was confident that some important disagreements had been resolved, and would perhaps put to rest any further debate on how to prevent companies from being branded too big to fail.

“I’m satisfied, as I believe my colleague from Alabama is, that we’ve reached an agreement on the too-big-to-fail provisions,” Mr. Dodd said on the floor.

Senator Barbara Boxer, Democrat of California, has also proposed an amendment making clear that taxpayers should not pay for future bailouts of failing financial companies, and essentially requiring that the government liquidate assets and put such companies out of business. That amendment is also expected to win bipartisan support.

But some liberal Democrats are still readying amendments that are intended to go much further than the agreement reached between Mr. Dodd and Mr. Shelby, including an amendment that would force some of the largest financial companies, including Citigroup and Goldman Sachs , to substantially reduce their size.

That amendment, proposed by Senator Sherrod Brown, Democrat of Ohio, and Senator Ted Kaufman, Democrat of Delaware, would limit the size of banks holding federally insured deposits to no more than 10 percent of the nation’s deposits. And it would limit nondeposit liabilities of banks to no more than 2 percent of gross domestic product.

Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, voiced his support on Tuesday for the Brown-Kaufman proposal.

While the deal between Mr. Dodd and Mr. Shelby seemed to put to rest a loud partisan dispute in recent weeks over whether the legislation might somehow perpetuate taxpayer bailouts, it also highlighted that the definition of a “taxpayer bailout” is in many ways a question of semantics.

The proposed $50 billion fund, which was to be financed by a tax on big banks, was a means to avoid using taxpayer money to wind down failed financial companies. The F.D.I.C. similarly levies an assessment on banks, which it uses to help pay for bank failures.

Some Republicans had objected to the creation of a new $50 billion fund; Mr. Shelby, for instance, repeatedly derided as a “honey pot” that might get misappropriated for other purposes.

As Senate leaders worked to broker agreements that would allow for the first floor votes in the financial regulation debate, Mr. Dodd said that there were numerous amendments already put forward that could easily win bipartisan support.

Among them was an amendment proposed by Senator Jon Tester, Democrat of Montana, to change the way the Federal Deposit Insurance Corporation calculates how much banks must pay for deposit insurance.

Assessments for the deposit insurance fund are currently calculated as a percentage of a bank’s domestic deposits. Mr. Tester’s amendment calls for the assessments to be based on a bank’s liabilities — essentially any insured deposits plus other borrowings by the bank.

That would result in the biggest banks, which raise less of their capital from insured depositors, paying higher amounts into the insurance fund than they currently do.

Mr. Dodd said he supported the amendment, which he said was “fundamentally about fairness.”

“The change will help to ease the burden of F.D.I.C. assessments on our community banks by requiring the largest banks in the country to shoulder a little more of the responsibility to rebuild and maintain a sound deposit insurance fund,” he said.

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