An Obama administration plan to dissolve large, struggling financial firms rather than bail them out is encountering Republican resistance, Democratic doubts and only qualified support from regulators.
At a Financial Services Committee hearing in the House of Representatives on Thursday, lawmakers from both parties worried that the proposal would give regulators and the executive branch unprecedented power.
“I’m not a man that fears this administration or you,” Democratic Rep. Paul Kanjorski told Treasury Secretary Timothy Geithner. “But I do fear the accumulation of power exercised by someone in the future that can be extraordinary.”
Others argue that by singling out financial firms important to the economy, the government could inevitably set itself up to bail them out, and that even dismantling rather than rescuing them would require taxpayer money.
“Apparently, the `too big to fail’ model is too hard to kill,” quipped Republican Rep. Ed Royce.
Rep. Brad Sherman, another Democrat, called the bill “TARP on steroids,” referring to the government’s $700 billion Wall Street rescue fund from the administration of Republican President George W. Bush.
“You’ve got permanent, unlimited bailout authority,” he told Mr. Geithner.
Mr. Geithner disagreed. “The only authority we would have would be to manage their failure,” he told the committee.
The debate comes as Congress works on legislation to respond to the financial crisis that clobbered Wall Street last year and fed the recession.
For the committee’s chairman, Democratic Rep. Barney Frank, who wrote the proposal in close coordination with Treasury, the broad scepticism illustrates the delicate work needed to tackle such a big task.
The legislation would let federal regulators identify and monitor big financial firms and step in to wind them down before they collapsed. If the government must use public money to dissolve a company, Treasury would recoup those costs by imposing a fee on firms with assets of at least $10 billion.
When to create such a fund has become a significant point of contention.
Mr. Frank and the administration recommended that any taxpayer infusion be recovered after the fact from large institutions.
But Sheila Bair, head of the Federal Deposit Insurance Corp., which would conduct such a wind-down, said the industry should pay into an insurance-like fund ahead of time.
Large financial firms, however, oppose an upfront payment. And Mr. Geithner said a prepaid fund would increase the temptation - or “moral hazard” - for companies to take excessive risks with the expectation that the government will step in to protect them.