MYTH #1 - The bill does not provide bailout authority.

• REALITY: TARP II authorizes the FDIC to use resources to make payments to anyone in any amounts. For example, Section 204(d) of the bill would give the FDIC broad authority to use the resolution fund in whatever way the FDIC determines to be "necessary or appropriate." Also, the bill provides the Fed and the FDIC with broad discretion to pay creditors more than they would receive in bankruptcy.

MYTH #2 - TARP II prevents taxpayer funded Wall Street bailouts.

• Reality: TARP II attempts to wipe out the shareholders and management of firms placed in receivership, but the bill provides the FDIC with significant latitude to bailout counter-parties and creditors. Such discretion given to government regulators, with a mandate to prevent systemic failure provides an incentive for the FDIC to access taxpayer funds, including a bailout fund, unlimited FDIC guarantees, and a Treasury line of credit. A firm could be propped up until its creditors and counter-parties are paid. For example, while AIG is being propped up, it paid all of its debts to Goldman Sachs.

MYTH #3 - The $50 billion liquidation fund cannot be used to bailout a failed firm.

• REALITY: TARP II bill creates a $50 billion resolution fund that would get replenished from assessments on covered firms, ensuring a constant flow of funds from family and small business owners. In the event of a systemically significant or interconnected firm's failure, the fund would be available to bail out the creditors of the failed firm to prevent a "perceived" threat to the nation's financial stability. According to AEI's Peter Wallison, "[T]he $50 billion will be used to pay off the creditors, so that the market's fear of a general collapse will be allayed...The way to avoid that is to assure the market-in other words the creditors-that they will be paid. Otherwise, they will run from the failing company, and every other company similarly situated. That act-paying off the creditors when the government takes over a failing firm-is a bailout."

MYTH #4 - The bill does not perpetuate "too big to fail."

• REALITY: TARP II bill creates a special regulatory structure for select firms. Those select firms, supervised by the Fed, would have access to a bailout fund, a Treasury line of credit and FDIC guarantees will have an implicit guarantee of the US government. According to AEI's Peter Wallison, "The market will see immediately that the government has created Fannie Maes and Freddie Macs in every sector of the financial system...Since these firms will be too big to fail, they will be seen in the market-as Fannie and Freddie were seen-as ultimately backed by the government and thus safer firms to lend to than small firms that are not government backed."

MYTH #5 - The bill will not increase moral hazard.

• REALITY:  In a Financial Services Committee, Secretary Tim Geithner argued that large firms should be assessed the cost of liquidation after the FDIC liquidates a firm.  Secretary Geithner stated, "Such an ex-posting funding mechanism has several advantages over an ex-ante fund.  Most notably, it would generate less moral hazard because a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses.  In essence, a standing fund would be viewed as a form of insurance for those stakeholders."  (Ex post is "after the event."  Ex ante is "before the event.")  TARP II bill currently has an ex ante $50 billion bailout fund.  However, access to a bailout fund (ex ante or ex post) increases moral hazard.  The market would recognize such advantages as a "form of insurance for those stakeholders."