By Shahien Nasiripour for The Huffington Post

Former Federal Reserve Chairman Paul Volcker believes the centerpiece of the administration’s effort to end Too Big To Fail — the perception that the nation’s largest banks will always be bailed out when in trouble — will not actually apply to megabanks.

In a September 2009 speech on Wall Street, President Barack Obama said that the administration’s preferred way to dismantle failing systemically-important firms is a new “resolution authority” outside the normal bankruptcy process. The authority, which would enable regulators to wind down failing financial behemoths, “is intended to put an end to the idea that some firms are ‘too big to fail,'” Obama said.

His top economic adviser, Lawrence Summers, has said that ending Too Big To Fail is the administration’s “central objective” in reforming the financial system, and that resolution authority is the “most crucial” part of that plan.

But on Monday, during a discussion on CNBC, Volcker, the head of Obama’s Economic Recovery Advisory Board, said the proposed authority is a “workable proposition for anything short of these biggest banks.”

The Senate and House financial reform bills feature the resolution authority as a way to end TBTF. The bills are based on Obama’s June 2009 blueprint for reforming the financial system.

According to Volcker, it isn’t “workable” for the nation’s megabanks.

Volcker appeared on the program with William Isaac, the former chairman of the Federal Deposit Insurance Corporation, who added that the legislation is “not going to prevent the top five banks from being saved.”

“We will save them,” Isaac said. Speaking about a potential future financial crisis, the former bank regulator said that Congress “would jump in with more legislation to bail out those banks. I don’t have any doubt about that,” he added.

In a recent report, Moody’s Investors Service voiced similar concerns about the legislation’s attempt to end the perception that policymakers won’t step in to bail out the nation’s largest and most interconnected financial institutions.

The criticism from two former top bank regulators also echoes recent remarks by Federal Reserve Bank of Dallas President Richard Fisher, who argues that the bill doesn’t come close to ending TBTF. Rather, he believes the nation’s megabanks either need to significantly shrink, or be broken up.

In an April speech about the financial crisis and the need for fundamental reform, Assistant Treasury Secretary for Financial Institutions Michael S. Barr said “we must end the perception of ‘too big to fail.'”

“Without reform, the expectation that some firms are too big to fail will survive,” he said. Barr added that the Senate bill, largely authored by Banking Committee Chairman Christopher Dodd with heavy input from Treasury, “contains strong measures to put an end to the perception that some firms are ‘too big to fail.'”

The candid talk, however, from two former top regulators, including the revered Volcker, whose various reform proposals have been embraced by the White House and have made him a darling in the pro-reform community, calls into question the veracity of the administration’s claim that the pending legislation before Congress will truly end TBTF.

Critics of the legislation, including Fisher and the president of the Kansas City Fed, Thomas Hoenig, argue that it doesn’t end TBTF because it lacks a credible threat that policymakers won’t step in with a bailout when a megabank faces failure. Some, like former chief economist of the International Monetary Fund and current HuffPost contributing editor Simon Johnson, point to the unwieldy international coordination issues involved in dismantling a failing firm with vast international reach during a time of distress. Isaac said on CNBC that “we have five banks that control over 50 percent of the banking system. No government can allow very large banks that control over half the financial system to go down.”

And according to Volcker, the proposed resolution authority just won’t work for the nation’s biggest banks.

In March, Geithner dismissed the other alternative, bankruptcy.

“I do not believe there is a credible alternative to this basic structure,” Geithner said of the proposed resolution authority. “The normal bankruptcy regime cannot work for banks, because banks need funding to operate even as they are being wound down. Without funding, they would have to liquidate in a disorderly manner. In a crisis, there is no plausible private source of temporary financing, like debtor in position financing, for companies in bankruptcy.”

That leaves taxpayer-financed bailouts as the only option to deal with failing systemically-important firms.

Such firms — which many observers believe to be Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley, among others — enjoy the support of an implicit government backstop. This allows them to issue debt at a lower cost than their competitors because their creditors credibly believe that they’ll be bailed out should times get rough. Collectively, the firms save billions of dollars a year thanks to this implicit government guarantee.

“Ending the existence of TBTF institutions is certainly a necessary part of any regulatory reform effort that could succeed in creating a stable financial system,” Fisher said earlier this month. “It is the most sound response of all. The dangers posed by institutions deemed TBTF far exceed any purported benefits. Their existence creates incentives that will eventually undermine financial stability.”

BofA, JPMorgan, Citi, Wells, Goldman and Morgan — the nation’s six biggest bank holding companies by assets — collectively hold more than $9.4 trillion in assets, according to their most recent quarterly filings with the Federal Reserve, a figure equivalent to two-thirds of the nation’s total economic output last year, according to International Monetary Fund figures. It’s also greater than the 2009 output of every other nation in the world.

An e-mail sent to a Treasury Department spokesman requesting comment was not immediately returned.

Andrew Williams, a Treasury Department spokesman, referred the Huffington Post to five statements since October from senior agency officials that reflect Treasury’s position on the proposed legislation and its ability to end TBTF. In short, the agency strongly believes that it does.

The resolution authority proposal is “a bit of a red herring” when it comes to credible ways to end TBTF, said Heather McGhee, Washington director of Demos, a public policy organization. It won’t work, she said.

While McGhee believes the resolution authority could be effective for some systemic firms, like the former Bear Stearns or Lehman Brothers, she agrees with Volcker that it wouldn’t work for the large banks that dominate the nation’s financial system, like JPMorgan Chase, Citigroup, Bank of America and Wells Fargo.

She argues that megabanks need to shrink or be broken up, which is why she supports a reinstatement of the Glass-Steagall Act — a Depression-era law that prohibited commercial banks from engaging in investment bank activities, and vice-versa — and why she fought for a provision pushed by Democratic Senators Ted Kaufman of Delaware and Sherrod Brown of Ohio that would have dismantled the nation’s biggest banks. The Senate voted it down.

With the White House pushing to sign the bill into law by July 4, McGhee said that at this point she’s concentrating on measures that would help prevent the nation’s financial behemoths from needing a bailout in the first place.

She points to the Volcker Rules, named after the former Fed chairman, which would prohibit banks from making bets with their own capital for their own profit; Senate Agriculture Committee Chairman Blanche Lincoln’s proposal that would force the megabanks to reorganize their derivatives units in separately-capitalized affiliates, which would force them to raise even more capital to guard against losses and potential failure; and the portion of the Senate bill that deals with derivatives, which she argues will clamp down on the under-regulated derivatives dealing and trading on Wall Street.

They’re the “three most important measures to prevent bailouts,” McGhee said, because they’ll change the way financial giants conduct business so they’ll never get to the point of failure.

But better regulation alone won’t end TBTF.

“No financial regulatory system will ever be perfect. Financial firms will always overreach and get into trouble,” Geithner told a House panel in April.

“Because government oversight alone will never be sufficient to anticipate all risks, increasing market discipline is an essential piece of any strategy for combating too-big-to-fail,” Federal Reserve Chairman Ben Bernanke said in March. “To create real market discipline for the largest firms, market participants must be convinced that if one of these firms is unable to meet its obligations, its shareholders, creditors, and counterparties will not be protected from losses by government action.

“To make such a threat credible, we need a new legal framework that will allow the government to wind down a failing, systemically critical firm without doing serious damage to the broader financial system.

“In other words, we need an alternative for resolving failing firms that is neither a disorderly bankruptcy nor a bailout,” the nation’s central banker added.

“We must have it when the next big financial firm gets into trouble,” Geithner said in April.

But according to two former top bank regulators, it just won’t work for the nation’s largest banks.