FDIC, Treasury, and Failure Fund Seek To Stop Economic Drain From “Too Big To Fail” Businesses

A proposal for a Failure Fund is in the works but the Treasury and the FDIC aren’t seeing eye to eye on the specifics of the bill that would cost creditors and shareholders if a “too big to fail” company required assistance. The FDIC chairman Sheila Bair wants a Failure Fund that would collect money from institutions before a bailout is needed, meaning a company would put money into the fund which would be used if the company failed, rather than tax-payer money. Treasury Secretary Timothy Geithner wants the fund to cost a company after it has reached failure and according to the Treasury would also keep from using taxpayer money.

Pre-Failure Fund: The idea of companies paying into a fund pre-failure would work like insurance in essence and many feel this is a practical plan. However, opponents of the idea say this is going to give investors of such a company the idea they are actually insured and would be covered against any losses, which isn’t the case. Those for the Pre-failure Fund say companies wouldn’t “play loose” with their business practices and therefore the pre-plan is the best.

Post-Failure Fund: The argument here is a company would be pretty much handed to the FDIC and the money to correct that firm would come from its assets and at the expense of the creditors and shareholders. Arguments against this plan say that in the case of a failed company anyone left standing would have to pick up the bill and a failing institution may not have enough assets to aid in repair.

Both plans do seem to keep taxpayers from picking up the bill of failed companies so no one can really argue the point that a Failure Fund would be an incredible asset and make companies more accountable for their actions, but does a Failure Fund provide a safety net which companies will use to make riskier decisions? Ideally, the Failure Fund would take money from the failing company which would cause said company to act in it’s best interest and many argue no company is going to purposely run toward failure.

However, as we have seen companies often gamble in the hopes of making more and more money despite the high risk. Is this Failure Fund proposal only going to increase the gambling of institutions in their business practices or will it provide accountability, which will reign in economically dangerous actions?

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