President Barack Obama on Tuesday endorsed a bill in the U.S. House of Representatives that would give the government unprecedented power to seize bank holding companies teetering on the brink of collapse and stick their competitors with the cost.
In a letter to House Financial Services Committee Chairman Barney Frank, Obama said the belief among financial executives that the government would ultimately protect them creates a "perverse incentive" for large firms to take reckless risks.
"Taxpayers simply must not be put in the position of paying for losses incurred by private institutions," Obama wrote in the letter, obtained by The Associated Press.
Under Frank's proposal, a council of regulators would be established to monitor financial firms regarded as so big and influential that their collapse could bring down the U.S. economy.
If the council should determine that a firm has grown too big and dangerous, the
Federal Reserve could step in to dismantle it. Firms with more than $10 billion of assets would be responsible for covering any outstanding costs.
The agreement paves the way for the bill's swift approval. Frank's committee was expected to consider it next week with a floor vote anticipated as early as November.
The proposal is the latest step by Obama and congressional Democrats to overhaul the regulatory framework governing financial institutions and clamp down on the kind of risky market bets that contributed to last year's market crisis.
On Tuesday, Frank's committee voted 67-1 on legislation that would force hedge funds and other large privately managed pools of capital to register with the Securities and Exchange Commission and undergo periodic examinations.
Frank's latest proposal to give the government the power to unwind large, influential nonbank firms is not expected to generate the same kind of consensus. Republicans probably will oppose the measure because they say it would create the expectation that some companies will be bailed out by the government because of their designation as being critical to the health of the economy.
Democrats counter that the bill will prevent future bailouts because it will enable regulators to dismantle these firms.
The companies also would be required to hold more money in reserve and would have a tougher time borrowing against their assets, which presumably would make it less likely they would fail.
Obama credited Frank for acting "quickly and in the face of substantial opposition."
Federal regulators already can dismantle banks. But the government was powerless last year at the height of the financial crisis when large bank holding companies and other nonbank institutions started failing, such as insurance giant American International Group.
Who should pay to dismantle these firms had been considered among the toughest questions that Congress had to answer after last year's near-collapse of several firms that prompted hefty government bailouts.
Lawmakers know that voters are still angry from the bailouts and do not want to see taxpayer money on the line. At the same time, businesses say it is unfair to force them to invest their capital in advance to pay for the mistakes of others.
Another major issue for lawmakers was how much power to give the Federal Reserve, the U.S. central bank. Many lawmakers blame the Fed for the current financial crisis and said it should not be trusted to monitor the largest financial institutions for their risk to the economy.
Whereas Obama's proposal would have put the
Federal Reserve in charge of monitoring these large financial institutions, Frank's plan gives more power to a council of regulators. The council would monitor the firms and set policy, while the Fed would be in charge of enforcement.
On Wednesday, the House Financial Services Committee was expected to approve legislation that would give the Securities and Exchange Commission more money and power to police the stock market and set new rules for credit rating agencies.
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