Recently unveiled legislation to address potential failures of large financial companies might not survive without significant changes.
The legislation drafted by the Treasury Department and Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, gives the federal government power to regulate, seize and dismantle large companies whose failure poses a risk to the U.S. economy.
It was hit from both directions 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 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 it this week. He admitted there would be changes.
Treasury Secretary Timothy Geithner told the committee that new powers were needed to prevent a repeat of the economic turmoil of autumn 2008.
The government let Lehman Bros. fail, and the Federal Reserve stepped in to save American International Group because there was no process for the U.S. to take over large financial institutions and sell off their assets, as federal 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. Management would be fired, unsecured creditors would be forced to take losses and shareholders could be wiped out. After a company’s assets were sold, any taxpayer costs would be paid by other large and medium-sized companies through assessments.
The plan also would allow tougher requirements on large financial companies 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 in the private marketplace and spend taxpayer money. The bill places no limit on how much the government could spend after stepping in to prevent a bankruptcy, and it lets federal officials use government money to let the company continue in business.
“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 Kanjorski, D-Pa., told Geithner.
Opponents said the proposal would make bailouts more likely, not less, by signaling the government would step in to 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 failure.
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