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It's MORNING EDITION from NPR News. I'm Steve Inskeep.
RENEE MONTAGNE, host:
And I'm Renee Montagne.
When the financial crisis was at its worst a year ago, the government had two bad options. It could spend billions to bail out troubled and large financial firms, or it could let them fail and risk economic disaster. The government has been trying to figure out a way to prevent a repeat of that, and Treasury Secretary Timothy Geithner talked about this problem yesterday in New York.
Secretary TIMOTHY GEITHNER (Department of Treasury): You want to build a system where neither investors nor institutions live with the expectation that the government will come in and insulate them from the cost of their mistakes in the future.
MONTAGNE: After Timothy Geithner spoke, the Obama administration and Barney Frank, the chairman of the House Financial Services Committee, unveiled a draft bill intended to put the burden on the large financial companies and not the taxpayers.
NPR's Tamara Keith explained how it would work.
TAMARA KEITH: The financial regulatory system gets a makeover in this bill. To start with, it creates a powerful new council charged with finding and eliminating threats to the system. The Financial Services Oversight Council would include the whole alphabet soup of regulators who, in the past, didn't do such a good job of working together. Scott Talbott is the chief lobbyist for the Financial Services Roundtable, an industry group.
Mr. SCOTT TALBOTT (Chief Lobbyist, Financial Services Roundtable): Each regulator had their areas, had their institutions that they were regulating, but they didn't share information across and between the regulators.
KEITH: Which is how you got a mortgage broker putting a family in a loan they couldn't afford, selling the loan to a bank that bundled it and sold it to an investor who went out and bought a credit default swap.
Mr. TALBOTT: And no one stopped along the way to say the emperor has no clothes. Each regulator had a small piece of that transaction, but no one stopped to look over the entire transaction to see the threat that that transaction multiplied a thousand times, a million times posed to the entire system.
KEITH: So this council would look out for those kinds of things. But it would also pay extra attention to firms that on their own could pose a systemic risk, either because they are very large, or as Jane D'Arista says, very connected.
Ms. JANE D'ARISTA (Researcher, Economic Policy Institute; Americans for Financial Reform): It's so connected with others - as Lehman was or as Bear Stearns was or AIG - that if it were to go down, it would cause other firms to become much weaker.
KEITH: D'Arista is a researcher at the Economic Policy Institute, and she's working with a group called Americans for Financial Reform. She isn't convinced this draft bill goes far enough. Under the legislation, the council would have sweeping powers to create new rules for these big systemically important firms. It could set capital requirements and even tell a company it needs to split off a risky part of its business. And if a firm is in trouble, the council can decide it's time for the government to step in and wind things down in an orderly fashion. Darrell Duffie is a finance professor at Stanford.
Professor DARRELL DUFFIE (Finance, Stanford University): The idea is rather than trying to patch them together with government money, to try to take them apart as quickly and efficiently as possible with the least amount of government money and make the shareholders bear the costs of getting themselves into that situation.
KEITH: Or in other words...
Prof. DUFFIE: Allow us to avoid, you know, the $85 billion emergency investment - I'll call it, to put it in a kind light - in AIG.
KEITH: If the council decides the end is near, the FDIC would come in and wind down the institution, just like it does now with banks. But how to pay for the unwinding of the next AIG? The firm's assets would be sold off to cover some of the costs. The rest would be picked up by the nation's largest institutions, those with more than $10 billion in assets. Again, Scott Talbott.
Mr. TALBOTT: They've structured it so that anybody over 10 billion would be on the hook for the costs of the failure of one of their brethren, and that's a pretty small club, above 10 billion.
KEITH: Talbott says there are about 120 firms in that club. His industry does have some concerns with the legislation, but is generally supportive. The bill will get its first hearing on Thursday.
Tamara Keith, NPR News, Washington.
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