Share
WASHINGTON Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near-collapse of the financial system last year: how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble.
Rep. Barney Frank, the chairman of the House Financial Services Committee, will introduce legislation that would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution, a senior administration official said Sunday.
The decision to introduce the bill, possibly this week, follows extensive consultation with Treasury Department officials, the source said.
The official said Treasury Secretary Timothy Geithner planned to endorse the changes in testimony before the House Financial Services Committee on Thursday.
The White House plan as outlined so far would already make it much more costly to be a large financial company whose failure would put the financial system and the economy at risk. It would force such institutions to hold more money in reserve and make it harder for them to borrow too heavily against their assets.
The plan would set up the equivalent of living wills for corporations. It would require corporations to come up with their own procedure to be disentangled in the event of a crisis, and administration officials say that plan ought to be made public in advance.
"These changes will impose market discipline on the largest and most interconnected companies," said Michael Barr, assistant Treasury secretary for financial institutions.
One of the biggest changes the plan would make, he said, is that the process is controlled by government, not creditors.
Some regulators and economists have suggested in recent weeks that the administration's plan does not go far enough. They say the government should consider breaking up the biggest banks and investment firms long before they fail, or at least impose strict limits on their trading activities - steps that the administration rejects.
Frank, D-Mass., said his committee will take up more aggressive legislation on the topic. Lawmakers and regulators are still working on other problems highlighted by the financial crisis, including overseeing executive pay, protecting consumers and regulating the trading of derivatives.
Illustrating the mood of fear and anger over the huge taxpayer bailouts, Frank observed recently that critics of the administration's health care proposal had misdirected their concerns: Congress would not be adopting death panels for infirm people but for troubled companies.
The administration and its congressional allies are trying to graft the process used to resolve the troubles of smaller commercial banks onto both large banking conglomerates and nonbanking financial institutions whose troubles could threaten to undermine the markets.
That resolution process gives the government far more sweeping authority over the institution and imposes major burdens on lenders to the companies that they would not ordinarily face when companies go into bankruptcy instead of facing a takeover by the government.
Deep-seated voter anger over the bailouts of companies like American International Group, Citigroup and Bank of America has fed the fears of lawmakers that any other changes in the regulatory system must include imposing more onerous conditions on financial institutions whose troubles could pose problems for the markets.
Some economists believe the sheer size of some institutions threatens the financial system. Because these companies know the government could not allow them to fail, the argument goes, they are more inclined to take risks.
Under the current regulatory structure, the government has limited power to step in quickly to resolve problems at nonbank financial institutions that operate like the failed investment banks Lehman Brothers and Bear Stearns, and like the giant insurer AIG.
As Wall Street has returned to business as usual, industry power has become even more concentrated, thus intensifying the debate over how to minimize risk to the system.
Some experts, including Mervyn King, governor of the Bank of England, and Paul Volcker, the former chairman of the Federal Reserve, have proposed drastic steps to force the nation's largest financial institutions to shed their riskier affiliates.
In a speech last week, King said policymakers should consider breaking up the largest banks and, in effect, restore the Depression-era barriers between investment and commercial banks.
"Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are," King said.
Industry executives and lawyers say the administration's approach could make it unnecessarily more expensive for them to do business.
"Of course you want to set up a system where an institution dreads the day it happens, because management gets whacked, shareholders get whacked, and the board gets whacked," said Edward Yingling, president of the American Bankers Association. "But you don't want to create a system that raises great uncertainty and changes what institutions, risk management executives and lawyers are used to."
Timothy Ryan, the president of the Securities Industry and Financial Markets Association, said many institutions on Wall Street were concerned that the administration's plan would remove many of the bankruptcy protections given to lenders of large institutions.
