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Senators Near Agreement On $50 Billion Fund To Wind Down Failing Financial Firms

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Senate leaders are nearing agreement on the creation of a $50 billion resolution fund to finance the termination of failing financial firms, Bloomberg reports.

The fund, which would be paid for by fees levied against large financial institutions, is intended to protect taxpayers from expensive future bailouts.

Treasury Secretary Geithner reportedly met with Virginia Democrat Mark Warner and Tennessee Republican Bob Corker yesterday to negotiate the proposal. Sources close to the process, Bloomberg reported, said the plan under discussion would likely charge the Federal Deposit Insurance Corp. with the bulk of the responsibility for winding down failing institutions. Here's Bloomberg:

The Senate compromise would give the Federal Reserve the power to decide which firms would pay into a trust fund that would be held and managed by the Treasury, according to a person familiar with the matter. Banks deemed to be a systemic risk would pay into the fund, and the firms could earn interest, the person said. The trust would be structured to avoid altering a company's earnings or capital levels, the person said.

Should a systemic firm fail, Treasury would transfer cash from the $50 billion fund to the resolution authority to cover any costs to shut the firm. The FDIC then could assess the banking industry for any losses incurred by the trust fund, the person said...

A similar $150 billion resolution fund was incorporated into the financial reform legislation the House passed in December. House Democrats insisted that the financial industry bankroll any future financial rescues in advance, despite claims by Treasury Sectretary Tim Geithner and House Republicans that pre-paying for the fund would create "moral hazard." (Firms, they argued, are likely to assume more risk if they're confident they'll be bailed out.) But not all Republicans opposed the fund's creation, the AP reported:

But one Republican, Federal Deposit Insurance Corp. chairman Sheila Bair, rebutted the House GOP critics, commending the legislation for creating a system to dismantle failing firms. "Ending too-big-to-fail by creating an effective resolution regime that will apply to large financial institutions is the key to ensuring that we end the need for future bailouts," she said.

Bair reiterated her support for the bailout mechanism this week, telling the Financial Times that "a very strong argument can be made" for a pre-paid fund:

"I think it would be for both in aggregate about $10bn a year," she said. "It is not an insignificant amount of money but spread over the largest institutions that would be paying into it - I don't think it would be a tremendous hit to their balance sheet."

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