First Budge? Administration Offers Concession To GOP On Financial Reform

Alright. So the basic thing the government does is the same in either case-- it replaces management, sells all assets, pays back as many obligations as it can. Not necessarily in that order?

There's two reasons you need money to do this: one, to pay out obligations, two, because actually auditing the whole thing and working out what assets there are and what obligations there are and running the lights in the building while this is all going on costs money. Right?

The second kinds of costs could be potentially significant, but whatever-- that's easy to hide inside of an existing agency budget. The first kinds of costs are something different.

The first kinds of costs are a lot more problematic. Ideally I imagine they'd sell the assets, then pay the obligations, and the government never has to contribute a dime. However I see two problems: First off, what if for some kind of economic stability reasons it makes sense to pay off obligations *before* the assets are sold? Second off, what if there are significantly more obligations than the assets turn out to be worth in the end? Does the bill in these cases actually just say, screw it, too bad? Obligations have to wait until the asset sales are done, and if we come up short in the end then that's all the money anyone's getting? I know the bill has a priority list, and investors and some kinds of obligations are at risk for being wiped out completely-- could potentially EVERYONE get wiped out, if the assets turn out to be worth literally nothing?

Because if the government does have to pay out money on obligations from a failed firm, whoever it's to, whether or not it gets the money back later or who it gets the money back from-- then it will get labeled a "bailout". The last year or so has made it clear that people are just as angry about "bailouts" even if the government eventually gets 100% of the money back.

So if that's going to happen, ever, it seems much better for it to come out of something like this $50 billion insurance-ish fund the Dodd bill sets up, than for it to come out of the government's own pockets.

How does this work? Has anyone read the bill? Am I missing anything?

That is a total mischaracterization of the fund. It's purpose is not to keep an institution operating once it has crashed. It is to ensure that there are the funds available to unwind it and liquidate the assets without needing to tap the "systemic assistance" federal funds that will be built into this bill no matter what. The alternative plan requires banks to kick down the funding AFTER a crash happens - which is absurd on it's face. You are demanding that taxpayers continue to act as the ultimate backstop to losses that everyone acknowledges will occur in a failure scenario instead of requiring the banks to do a set-aside on the front end.

There was never any scenario in the Fannie/Freddie structure under which failure of was an acceptable outcome. This is still the case. There is no way to draw any inference from how we have handled that issue. What you are really highlighting is that public/private partnerships will always be gamed by the private component - making the very concept of privatization of government functions and systems to seem horribly ill-advised. Two different issues, but yes, you are right the government should just be running systems like Freddie/Fannie outright and then we wouldn't have to worry about corporate fat-cats (yes, including Rham Emmanuel) having a direct tap into our tax dollars.