Who pays the bill for "too big to fail" banks that fail?

Lots of discussion going on in various circles. Paul Volcker (former Fed chairman) and Mervyn King (governor of the Bank of England) have been pushing for regulations that essentially would restore the Glass-Steagall regulations separating commercial and investment banking. The former would be regulated and insured; the latter would be "let the buyer beware." In practice, FT columnist Martin Wolf points out that it would be very hard to separate the safe from the risky business lines in today's financial institutions. Thought: weren't mortgages thought to be safe, nonvolatile investments not too long ago?

Ben Bernanke proposed last week that we should have privately funded insurance to bail out banks whose failure would endanger the entire financial system. The model would be the Federal Deposit Insurance Corporation, which levies fees on banks to protect consumer deposits up to $250,000. Of course bank customers would end up paying these fees, but Congress might be happier with that compared to the alternative -- another bailout.