The Financial Industry's Plan for Resolving Failed Megabanks Will Ensure Future Bailouts for Wall Street

Authors

Arthur E. Wilmarth Jr., George Washington University Law School

Publication Date

2015

Abstract

Wall Street has achieved a remarkable political comeback from the financial crisis of 2007-2009. Public anger over bailouts of large financial institutions spurred Congress to pass the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank) in July 2010.1 Megabanks, however, used their political influence to weaken Dodd-Frank's provisions, and they have pursued a determined campaign since 2010 to undermine Dodd- Frank's implementation. A primary goal of Dodd-Frank is to end "too big to fail" (TBTF) treatment for systemically important financial institutions (SIFIs) and their creditors. During the debates over Dodd-Frank, however, Wall Street defeated two major initiatives that would have threatened megabanks' TBTF status. First, Wall Street's political allies voted down a proposed amendment by Senators Sherrod Brown and Ted Kaufman, which would have forced a breakup of the six largest U.S. banks. Second, Wall Street's allies blocked proposals that would have required the largest financial institutions to pay risk-based premiums to prefund the Orderly Liquidation Fund (OLF). As discussed below, the OLF provides funding for resolving failed SIFIs under Title II of Dodd-Frank. Due to Wall Street's success in defeating the prefunding proposals, the OLF currently has a zero balance and must rely on borrowings from the Treasury Department (Treasury) and, ultimately, taxpayers.

Recommended Citation

Wilmarth, Arthur E. Jr. (2015) "The Financial Industry's Plan for Resolving Failed Megabanks Will Ensure Future Bailouts for Wall Street," Georgia Law Review: Vol. 50: No. 1, Article 5.
Available at: https://digitalcommons.law.uga.edu/glr/vol50/iss1/5