Reuters Summit-Geithner: Obama team to toughen ‘Too big to fail’ fix

By Reuters Staff
October 21, 2009

By Karey Wutkowski
WASHINGTON, Oct 20 (Reuters) – The Obama administration is planning to send lawmakers a fresh, tougher proposal that would give the government more tools to wind down troubled financial firms and reduce the idea of “too big to fail,” U.S. Treasury Secretary Timothy Geithner said on Tuesday.

“We’ll be looking at ways to strengthen those initial proposals,” Geithner said in an interview during the Reuters Washington Summit.

Geithner said the new language on so-called resolution authority will be designed to ensure that financial firms do not believe the government will step in to protect them from their mistakes.

Some lawmakers and regulators derided the administration’s proposal as too soft because it included language that would have allowed Treasury to step in with temporary support measures for troubled firms.

The Obama administration has called for a wide-range of regulatory reforms to prevent a repeat of the crisis that pushed the U.S. financial system to the brink of collapse last year.

Geithner said progress by the House of Representatives on financial reform is “very encouraging” and the Senate seems to be making headway on reaching consensus on reform issues, but he said it is imperative for lawmakers to move quickly.

“If you do that quickly, you’re more likely to get a stronger outcome and again, we should be pretty encouraged by the progress Congress is making here,” he said.

The House has taken the lead on the reform movement, having already passed a measure to curb abusive pay practices.

The House Financial Services Committee has approved new rules to regulate the derivatives market and is expected to complete work as soon as Wednesday on a bill to create a Consumer Financial Protection Agency.

The Senate has been slower to act, as it has been busy on healthcare reform. But Geithner said Senate Banking Committee Chairman Christopher Dodd has been working hard to build consensus so that comprehensive reform can be passed.

“He’s also committed to moving on a very, very tight, very ambitious timeframe and I think he’s making a lot of progress,” Geithner said.

Regarding resolution authority, Geithner said firms cannot be allowed to think that the government will bail them out in any circumstances.

He did not comment specifically on how the draft language would change. House Financial Services Committee Chairman Barney Frank said on Tuesday that he expects the administration to provide a new bill later this week or early next week.

“We will have a hearing on that on Thursday of next week,” Frank said at the outset of a committee working session on a separate financial regulation reform bill.

The resolution regime laid out in the administration’s original proposal softened the prospect that a large firm could be subject to a government-driven dismantling if it runs into severe trouble.

That proposal would have given Treasury the power to decide whether to first try to stabilize a large failing firm before appointing the Federal Deposit Insurance Corp as a conservator to unwind the institution.

“What we want to do is have a system where the
taxpayers are not at risk of bearing the burden of having to come in and bail out institutions that have made terribly damaging mistakes in the future,” Geithner said. “We don’t want firms to live with the expectation that the government will come in and do that in the future.”

(For other news from the Reuters Washington Summit, click on http://www.reuters.com/summit/Washington09?PID=500)
(For summit blog: http://blogs.reuters.com/summits/)

(Reporting by Karey Wutkowski and Kevin Drawbaugh; editing by Anthony Boadle) ((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8399))

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/