New Legislation To End Taxpayer Bailouts For Failed Firms

It was a new bill, unveiled Tuesday night by the Treasury Department and the House Financial Services Committee chairman Barney Frank (D - Mass.). The proposed legislation, its is said, would end the era of taxpayer bailouts for failed firms, and in particular those previously deemed "too big to fail."

The term "too big to fail" was coined during the financial meltdown to describe firms which were deemed so large that they could cause an economic collapse in addition to their own collapse. In other words, these firms were so big they posed a systemic risk to the market.

The bill would force such "too big to fail" financial firms to contribute to a "financial superfund," so that that fund, and in essence, the companies themselves, rather than taxpayers, would pay for the failure of such huge companies. This is similar to the way the Federal Deposit Insurance Corporation works in insuring consumers' assets in banks: banks pay into the FDIC fund to provide that protection.

Here's more on the "no more too big to fail" bill from House Financial Services Committee's website:

Costs to resolve a failing firm will be repaid first from the assets of the failed firm at the expense of shareholders and creditors, and to the extent of any shortfall, from assessments on all large financial firms. In this instance we follow the "polluter pays" model where the financial industry has to pay for their mistakes--not taxpayers [...]

[The] Resolution Fund is structured to spread the cost over a broad range of financial companies with assets of $10 billion or more, and provides for a flexible repayment period to avoid potential procyclical effect of such assessments.

The bill would also give the Federal Reserve the power to reduce the size of of banks, hedge funds and other financial firms with more than $10 billion in assets. It would also have the power to determine which firms are "too big to fail" and pose a systemic risk to the economy.