In one small corner, there’s me – I still say U.S. big banks aren’t TBTF. Occupying the rest of the ring is Moody’s which, even as it downgraded a bunch of behemoths, didn’t wreak as much havoc as it wanted because, it says, the banks still have an implicit guarantee.” We agree as far as non-U.S. banks go – in fact, we think the big-bank backstop is about as explicit as it gets in the E.U., where the problem isn’t the lack of a backstop, but rather the worrisome inability of the Continent to come up with the cash for it. But, Dodd-Frank cut the taxpayer umbilical cord, as I think any objective read of the law makes clear. The question is, then, whether one believes the law or, as Moody’s anticipates, expect America’s will to crack at the first sign of serious trouble. Markets are siding with me today – funding costs for big banks are on the way up – a phenomenon you wouldn’t see if investors not only agreed with Moody’s about big-bank risk, but also accepted the hypothesis that no major counterparty can take the fall for it.

Much in Moody’s view of U.S. banks is a walk down memory lane, a frequent byway for all of the rating agencies. Clients will recall that we took strong exception early on to all the AAAs bestowed on subprime MBS, arguing in the mid-2000s that the five-year stress scenarios on which these were based excluded the differences between prior mortgages and the no-doc, high-risk ones increasingly littering the landscape. Past then was no prelude, nor was it for the bond insurers. In late 2007, we took a look at an AAA-rated one for a private-equity firm and, based on a frightened look at the insurer’s big bet on Countrywide second liens, warned them off the acquisition. This left them cranky, but richer, as it of course turned out. Why the AAA for the muni-bond king at the time? Again, the ratings were based on the lack of risk to date, not all that was to come.

We take a lot of issue with what’s being done under Dodd-Frank, but not with Title II and all the rules the FDIC has put in place to implement its orderly-liquidation authority (OLA). The FDIC has plodded methodically through a set of rules so complex and mind-numbing that the press has largely ignored them and advocates arguing for TBTF have made of them what they will. Most recently, for example, AEI’s Peter Wallison has said that the law allows Treasury to commandeer “any” financial-services firm and, then, turn it into an arm of the socialist state (OK, he didn’t quite say the last part, but that’s what he meant). Not true on two counts.

First, Dodd-Frank is quite clear: OLA is a last resort. The law has a stringent process under which Treasury must find that an imminent failure threatens financial stability and, even then, get concurrence to its finding from various independent agencies. Sure, all could be in cahoots to call it a day for capitalism, but – ever hopeful — I’ll ignore the conspiracy theory of finance and discount this objection to OLA.

Second, if a big financial firm is seized and put under OLA, there’s no cushy landing for shareholders, management and – Moody’s take note – creditors. The law and, much to the consternation of some big banks, the FDIC’s rules require that OLA mimic bankruptcy, so that shareholders get wiped out, management gets the boot and creditors get no more than they would the good old-fashioned way. The only difference between OLA and bankruptcy – a very, very good one – is that the FDIC can establish a “bridge” entity to prevent panic runs. Solvency losses run through the financial system under OLA, but liquidity ones – long the point of financial regulation – are, it is hoped, averted.

One more thing: Dodd-Frank also makes it a lot less likely that bridges will be needed when troubled waters next run deep. Title I of the law is still under construction, but it includes a critical provision the FRB and FDIC have put in place. These are the resolution plans – less flatteringly called living wills – the biggest U.S. banks must file next month.

The regulators are putting big banks through the equivalent of the Quantico Marine Corp tri-athlete obstacle course as these plans are constructed. And, we expect, only a few big banks will cross the finish line without bruises. In part because of the complexity of big banks and ongoing risk-management woes – thanks, JPM – and in part to prove their fearless determination to quash TBTF, the regulators will take a few whacks out of a big bank or two after the plans are filed. The law gives them unfettered authority to force divestiture, restructure banks into subsidiaries or otherwise deconstruct complexity. If the agencies don’t use this power in some public way sometime soon, TBTF advocates will assert, with some merit, that the resolution regime is toothless. Knowing this, the regulators will take a bite out of someone.

And, when they do, Moody’s may finally take note: U.S. banks, even the very biggest, aren’t wards of the state anymore. Next stop, Fannie and Freddie