As early as today, the House is set to approve Rep. Barney Frank’s (D-MA) financial regulation bill intended to prevent future Wall Street bailouts by granting regulators sweeping new powers to control firms deemed “too big to fail.” But as Heritage Senior Research Fellow David John explains below, the Frank bill actually encourages future bailouts by signaling to markets that the targeted firms guaranteed against failure, thus enabling risky business decisions. Worse, by empowering the FDIC to seize and close failing financial institutions, while also establishing a fund enabling the FDIC to accomplish these tasks, the Frank bill does not end TARP, it creates a permanent TARP. Watch:

There is a better alternative: add a new chapter to the bankruptcy code that is explicitly designed to meet the special circumstances of “too big to fail” financial institutions.