Financial Regulatory Forum

Obama readies tougher ‘too big to fail’ strategy

By Reuters Staff
October 26, 2009

U.S. President Barack Obama (R) attends a fundraiser for U.S. Senator Chris Dodd (D-CT) in Stamford, Connecticut, October 23, 2009.  REUTERS/Jason Reed   (UNITED STATES POLITICS)   By Kevin Drawbaugh
WASHINGTON, Oct 26 (Reuters) – The Obama administration within days will move to get tougher with large financial firms that are in trouble by urging Congress to let the government seize control, wipe out shareholders, boot management and restructure debts, an administration official said on Monday.

The new White House strategy attacks the so-called “too big to fail” problem, or the market perception that some Wall Street giants and other financial groups are so large and interconnected that the government will never let them fail.

More than a year since the 2008 capital crisis began, world governments still have not fully addressed this issue. President Barack Obama is taking another run at it, building on a legislative proposal he sent Congress months ago.

The new draft bill is expected to take a tougher stance than before, possibly by dropping language that would allow for temporary government bailouts.

“In the coming days, the president will send a letter to Chairman Dodd and Chairman Frank setting out principles to guide the process,” the official said, referring to House of Representatives Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd.

The new proposal needs to “make it far more likely that equity holders and creditors sustain losses” in cases where the government intervenes to deal with a failing firm, said U.S. Comptroller of the Currency John Dugan on Monday.

Speaking with reporters at a conference in Chicago, Dugan said the proposal must also be flexible, giving the government options for dealing with failing non-bank firms.

The government already has an established method for resolving troubled banks: the Federal Deposit Insurance Corp routinely steps in to take over and dismantle them.

FDIC Chairman Sheila Bair said on Monday that a “growing consensus” is emerging on the need for a strong resolution authority for dealing with troubled firms that are not banks but whose failure could threaten financial system stability.

She said administration officials, top bank regulators and lawmakers agree that “resolution authority” needs to be a priority so financial firms do not take on excessive risk, thinking the government will save them.

“We need to end ‘too big to fail,’ ” Bair said in remarks to the American Bankers Association annual convention.

A council that includes U.S. Treasury Secretary Timothy Geithner would help set policy for dealing with troubled financial firms under the administration’s plan, CNBC television said, citing sources.

The FDIC would have authority to unwind large firms, said the TV business news channel.

Obama wants to avoid another episode like the 2008 collapse of former Wall Street giant Lehman Brothers and the bailout of former mega-insurer American International Group.

Post Your Comment

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/
  •