Geithner presses for government powers to wind down firms

Treasury Secretary Timothy F. Geithner on Thursday urged skeptical lawmakers to give the government broad new powers to wind down large financial firms, allowing them to fail in a way that would not pose serious risks to the economy.

"One of the most searing lessons of last fall is that no financial system can work if institutions and investors assume that the government will protect them from the consequences of failure," Geithner told members of the House Financial Services Committee. "Never again should taxpayers be put in the position of having to pay for the losses of private institutions. 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."

Under legislation unveiled this week by committee chairman Rep. Barney Frank (D-Mass.), in close coordination with the Obama administration, the cost of rescuing or dismantling a large, failed financial firm would be shared among its peers. Companies with more than $10 billion in assets would be assessed fees only after a large collapse, rather than contributing ahead of time into an insurance-like fund.

That notion has caused consternation among many lawmakers.

"Most of us don't die and then buy a life insurance policy," Rep. Luis Gutierrez (D-Ill.) said at the outset of Thursday's hearing, echoing the views of some members on both sides of the aisle.

Geithner, Frank and others have argued that a central goal behind the current proposal is to shift the cost of unwinding, or "resolving," a failed firm from taxpayers to financial institutions themselves, and to create an environment in which the failure of a single firm no longer threatens the entire financial system.

The legislation would require initial costs of any federal intervention to come at the expense of the failing firm's shareholders and creditors. Any costs beyond that would be paid with future assessments spread across other firms. Frank has equated the structure to a "polluter pays" model, saying that the financial industry, not taxpayers, should pay for its own mistakes.

Critics, however, have maintained that the structure would require an injection of taxpayer money upfront, without any guarantee that government would ever recoup the full amount. They also say that designating certain firms to be systemically important would create an implicit guarantee that the government would never allow them to fail.

"The bill we're considering today will actually institutionalize 'too big to fail,' " said Rep. Jeb Hensarling (R-Texas).

The measure seeks to solve one of the most complex and troubling issues that arose during last fall's crisis. The government sparked massive public outrage over its decision to bail out some of the country's largest financial firms, including American International Group, Citigroup, Bank of America, Fannie Mae and Freddie Mac. And yet, policymakers have said they felt they had little choice but to intervene and use taxpayer money to save those companies, lest their collapse trigger a chain of other failures throughout the economy.

Geithner said bankruptcy would remain the primary tool for most failing institutions. But he said the new legislation would create authority similar to what the Federal Deposit Insurance Corporation currently has to seize faltering commercial banks.

In addition, Geithner said it is critical that regulators be able to impose "strong constraints on risk taking and leverage" on companies in order to "limit dramatically any expectation of government support."

The new bill also proposed the creation of an oversight council to act as a monitor of systemic risk throughout the financial system. The council, led by the Treasury secretary and composed of top regulators, also would have the power to impose tougher regulatory standards on the largest companies. The bill also would give the Federal Reserve the central role in supervising the nation's largest and most complex financial firms.

Other federal regulators were scheduled to testify before Frank's committee Thursday afternoon, including FDIC chairman Sheila Bair; John Dugan, head of the Office of the Comptroller of the Currency; and Fed governor Daniel Tarullo.