NU Online News Service, May 6, 3:56 p.m. EDT

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WASHINGTON–Congress may act quickly on legislationcreating stronger resolution authority oversight for troubledfinancial institutions deemed "too big to fail," including insurersand hedge funds, Sen. Chris Dodd, D-Conn., chairman of the SenateBanking Committee, said today.

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Such a resolution authority should have the power to sell theassets of the troubled institutions promptly to other companies,FDIC Chairperson Sheila Bair said.

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Sen. Dodd made his comments at a hearing on systemic risk, atwhich Ms. Bair testified that creating a resolution regime thatapplies to any financial institution that becomes a source ofsystemic risk "should be an urgent priority."

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And, she said, putting the authority in place quickly couldencourage large financial firms to put more emphasis on dealingwith troubled assets.

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She also said federal regulators should have broad powers todeal with troubled institutions. She noted that "the purpose of theresolution authority should not be to prop up a failed entityindefinitely, but to permit the swift and orderly dissolution ofthe entity and the absorption of its assets by the private sectoras quickly as possible."

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That would seemingly address the complaints of property-casualtyinsurance companies and some members of Congress that thegovernment's loans of large sums of money to American InternationalGroup provides an unfair competitive advantage to AIG.

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Sen. Dodd said, "I will talk to my colleagues about whether weshould proceed quickly to implement this authority or wait to do itas part of a package."

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In comments to reporters as he left the meeting to head to theSenate floor for a vote, Sen. Dodd again indicated that he isrethinking his position of creating a resolution authority fortoo-big-to-fail institutions only as a part of a larger packagedesigned to deal with troubled large institutions.

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In her comments, Ms. Bair reassured members of the committeethat her agency had the ability to deal with resolving troubledbanks and non-banks.

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Indeed, under certain conditions, she said, the agency wouldhire subcontractors familiar with the particular institutions tohelp with the resolution process.

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She proposed creating a systemic risk council to address issuesposing risks to the broader financial system. Ms. Bair said thisbody would include the Treasury Department, the FDIC, the FederalReserve Board, the Securities and Exchange Commission, and…"otherprudential supervisors as well," i.e. including primary regulatorsof troubled insurance companies.

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But in dealing with troubled "too big to fail" institutions, Ms.Bair pictured federal agencies as having broad authority. Theyshould have the power to provide analytical support, develop neededprudential policies and mitigate developing risks–or preempt theauthority of the primary regulator.

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And, she said, "to be truly credible," a new systemic resolutionauthority should be funded by fees or assessments charged tosystemically important firms. "Fees imposed on these firms could beimposed either before failures, to prefund a resolution," which sherecommends, or fees could be assesses after a systemicresolution.

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She suggested that such assessments be paid by "systemicallysignificant financial companies" and be placed in a "FinancialCompanies Resolution Fund."

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A FCRF would not be funded to provide a guarantee to thecreditors of systemically important institutions but rather tocover the administrative costs of the resolution and the costs ofany debtor-in-possession lending that would be necessary to ensurean orderly unwinding of a financial company's affairs, shetestified.

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"Any administrative costs and/or debtor-in-possession lendingthat could not be recovered from the estate of the resolved firmwould be covered by the FCRF," she added.

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At the same time, if a company fell below the threshold of atoo-big-to-fail institution, the assessments would stop, shesaid.

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