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Geithner makes a pitch for regulation of financial industry

Treasury secretary tells a House panel that administration plan would allow firms to fail without risking 'catastrophic damage to the economy.' Republicans say it gives the government too much power.

October 30, 2009|Jim Puzzanghera

WASHINGTON — Recently unveiled legislation that seeks to avert the risk created by complex financial firms that are too big to fail might itself be too broad and complicated to survive without significant changes.

The 253-page bill is one of the most controversial provisions of the Obama administration's overhaul of financial regulations because it directly addresses the future of government bailouts. The legislation drafted by the Treasury Department and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, would give federal officials power to regulate, seize and dismantle large financial firms whose failure would pose a risk to the economy.

The proposal was hit from both sides at its first congressional hearing Thursday.

Some legislators faulted it for being too expansive, while others said it did not go far enough. Regulators such as Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corp., objected to some provisions as well.

Despite the concerns, Frank said he hoped his committee would vote on the legislation next week. But he conceded there would be changes.

Treasury Secretary Timothy F. Geithner told the committee the new powers were needed to prevent a repeat of last fall's economic turmoil.

The government allowed Lehman Bros. to fail, and the Federal Reserve stepped in to save American International Group Inc. because there was no process for the government to take over large financial institutions and sell off their assets, as regulators can do with banks.

"We need to build a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy," Geithner said.

The new "resolution authority" would allow the government to seize and dismantle a company in a process more orderly than bankruptcy. Management would be fired, unsecured creditors would take losses and shareholders' investments could be wiped out. After a company's assets were sold, any taxpayer costs would be paid by other large and medium-size firms through an assessment.

The plan also would allow regulators to impose tougher requirements on large financial firms to reduce their risk of failure and make it less attractive to become so large.

But Republicans and some Democrats said the proposal gives the government too much power to intercede into the private marketplace and spend taxpayer money. The legislation places no limit on how much money the government could spend after it stepped in to prevent a bankruptcy, and allows federal officials to use government money to enable the company to continue doing business and return to "a sound and solvent condition."

"I'm not a man that fears this administration or you, but I do fear the accumulation of power exercised by someone in the future that can be extraordinary," Rep. Paul E. Kanjorski (D-Pa.) told Geithner.

Foes said the proposal would make bailouts more -- not less -- likely by signaling that the government would rescue large companies, encouraging risky behavior.

But some Democrats said the plan did not go far enough, contending that the government should be able to break up companies, and that it should collect money from Wall Street in advance to cover taxpayers in the event of a failure.

Regulators also were split on aspects of the plan.

Bair said the proposed Financial Services Oversight Council, which would watch the economy for signs of major risk, would not have enough power and independence. And she favored collecting money from financial firms ahead of time to create a fund to pay any government costs associated with a seizure.

But Federal Reserve Gov. Daniel Tarullo said the legislation "provides a strong framework for achieving a safer, more stable financial system." The Fed would gain more power to supervise systemically important firms, a move that some lawmakers criticized because of the central bank's failure to prevent the current crisis.


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