Congress Takes On 'Too Big To Fail' Institutions

Congress is trying to rewrite financial regulations to avoid the company failures and rescues of the last 18 months. Treasury Secretary Timothy Geithner appeared Thursday before a key House panel to tout a plan that would allow federal regulators to unwind troubled financial companies, which are considered too big to fail. He got skepticism from both sides of the aisle.

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MELISSA BLOCK, host:

Congress wants out of the bailout business. It's trying to rewrite financial regulations to avoid the company failures and rescues of the last year-and-a-half. Today, Treasury Secretary Timothy Geithner went before a key House panel to sell the plan that would allow federal regulators to unwind troubled financial companies. We're talking about firms considered so big or interconnected that they could take down the entire financial system. Geithner got skepticism from both sides of the aisle, as NPR's Audie Cornish reports.

AUDIE CORNISH: Bailout is a dirty word on Capitol Hill. Lawmakers are still smarting from the $700 billion in funding from struggling firms that they approved last fall. So, the House Financial Services Committee is working on legislation that would create a council of regulators headed by the Federal Reserve to identify companies that pose risks to the system. This council would decide when regulators could step in and put a financial company on the brink of collapse out of its misery. Financial Services Committee Chair Barney Frank.

Mr. BARNEY FRANK (Chairman, House Financial Services Committee): There will be death panels enacted by Congress this year, I hope. But they will be for those large institutions who are to be put out of business, whose shareholders will be wiped out, whose executives will be fired, whose boards of directors will be replaced.

CORNISH: Under the proposal, a firm considered too big to fail would be secretly monitored and if necessary, restructured or carefully dismantled. Fronting the money for the process would be the U.S. Treasury or taxpayers. But the government would be paid back from company assets and fees collected afterwards from other financial firms. Right away, some lawmakers question the wisdom of having taxpayers pay upfront.

Representative LUIS GUTIERREZ (Democrat, Illinois): We read all about how good the Wall Street giants are doing once again and how their profitability is there. Well, they should set aside some of that money. Most of us don't die and then buy a life insurance policy.

CORNISH: That's Luis Gutierrez, a Democrat from Illinois. He says mega financial firms should pay into a pool to cover failures just like the mid-sized banks do with the FDIC. Republican Ed Royce of California says there shouldn't be a safety net for mega institutions. They should go through bankruptcy like everyone else.

Representative ED ROYCE (Republican, California): Instead of granting permanent bailout authority and institutionalize in the too-big-to-fail doctrine, which this legislation does, we should set up a structure that will allow for an orderly liquidation of an institution through an enhanced bankruptcy without the use of government funds.

CORNISH: Treasury Secretary Timothy Geithner disagreed.

Secretary TIMOTHY GEITHNER (Treasury Department): As the collapse of Lehman Brothers demonstrates, the bankruptcy code is not an effective tool for resolving the failure of complicated global financial institutions in times of severe stress.

CORNISH: When the global financial services firm Lehman Brothers filed for bankruptcy last year, the stock market plummeted and scores of other companies wobbled. In another scenario, the government sank billions into rescuing insurance giant AIG. This overhaul bill, says Geithner, offers an alternative.

Sec. GEITHNER: This proposed resolution authority would be limited to facilitating the orderly demise of the filling firm, not insuring its survival. It's not about redemption for the firm that makes mistakes. It's about unwinding them in a way that doesn't cause catastrophic damage to the economy.

CORNISH: Committee Chairman Barney Frank says this legislation, combined with new regulations over subprime loans, hedge funds and derivatives, will prevent the need for future bailouts. He also says it will be the most difficult part of the financial overhaul package to win approval.

Audie Cornish, NRP News, the Capitol.

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