Dueling reports leave Congress fighting over 'too big to fail'


One provision of the law allows regulators to identify banks and other institutions as "systemically significant." Republicans contend this label hands out an advantage to the singled-out firms and that the government has effectively identified them as "too big to fail."

But the Democrats contend in their study that this designation comes with increased regulation and oversight, as well as a requirement that the institutions establish "living wills" that would detail how they could be unraveled if they were on the brink of collapse. In their report, Democrats note that no firms have lobbied regulators to receive this designation, calling it "the gift that no one wants."

Another key battleground has been over so-called "orderly liquidation authority," which Democrats contend has been subject to "substantial, and repeated mischaracterizations" by Republicans. The GOP says it makes bailouts the law of the land, Democrats say it does the exact opposite.

Top regulators, in consultation with the president, could decide an ailing firm poses a threat to the financial system and needs to be taken over and wound down by the government. In this case, the Federal Deposit Insurance Corporation (FDIC) would step in as receiver and begin liquidating the firm over the course of at most five years. The regulator cannot take steps to help the solvency of the institution, only work to wind it down and sell it off in pieces. The Treasury can also lend funds to the FDIC to help it pay claims to creditors of the institution as part of the process.

Republicans questioned whether the FDIC even has the capacity to take on and wind down a massive financial institution with trillions of dollars in assets, and also suggested taxpayer funds could be put at risk as the FDIC pays back creditors of a failing firm.

But Democrats point out that while taxpayer dollars can be used up front during this winding down, the law lays out how the funds would eventually be paid back. The government would be the first repaid via proceeds from selling off the bank's assets, and the FDIC can claw back other payments to creditors if the government is still owed funds. And finally, if the government still needs to be paid back more, the remaining funds would be obtained from a fee assessed to the nation's largest financial firms.

But Republicans contend taxpayers are still bearing the risk.

"The proponents of the Dodd-Frank Act say that you will be paid back. Let’s hope that you are. But the bottom line is that it is your money, and you bear the risk," their report stated.

Republicans also used their report to stump for their preferred method of handling "too big to fail," a modified version of bankruptcy that could handle large failing financial firms.

Democrats took the offensive on this issue in their report, calling the GOP plan for enhanced bankruptcy a recipe to bog down bankruptcy proceedings, while encouraging runs on failing firms that begin such proceedings.