NU Online News Service, Sept. 23, 3:53 p.m. EDT
WASHINGTON–The House Financial Services Committee chairman committed his panel today to passing legislation giving federal regulators authority to liquidate troubled non-bank financial institutions including insurers.
"There will be death panels enacted by this Congress, but they will be for non-bank financial institutions that will not be considered too big to die," said Chairman Rep. Barney Frank, D-Mass.
His comment came as Treasury Secretary Timothy Geithner testified before the panel in defense of the administration's various regulatory reform proposals for financial services.
"I say that because we have this euphemism that we are going to be 'resolving' these institutions," Rep. Frank said. "It has not been my experience that when someone says they are going to resolve something, they kill it."
"We are talking about dissolution, not resolution," Rep. Frank said. "We are talking about making it unpleasant for the entities. This is not a fate people will want."
But Treasury Secretary Geithner did not support Rep. Frank's liquidation proposal.
Regarding too-big-to-fail, one of the justifications for bailing out American International Group, Secretary Geithner said he doesn't want to remove that option.
"We had a test of the proposition that you can solve a crisis by hoping it's going to burn itself out," he said. "And you saw how deeply damaging it was to the country as a whole."
As a result, he said, "you can't fix the system, make it more stable in the future, by hoping and promising that you're going to, how should I say it, abolish the fire station, lock the doors to the fire station when the crisis breaks out. It's not a strategy that works."
Secretary Geithner was the lead witness as the House panel began the process of dealing with legislative proposals submitted by the Obama administration to reform the nation's financial services regulatory scheme.
He said that regarding proposals to impose stronger regulation on large institutions, including non-banks like AIG, "Our plan for stricter supervision and regulation of the major financial firms will have several powerful effects."
He said it will force these firms to pay an appropriate regulatory price for the risks that their failure or distress could impose on the broader financial system.
Moreover, he said, "it will offset the perceived government support enjoyed by these firms, which should substantially reduce any competitive advantage they have due to the market's assumption that they would receive assistance in the event of failure.
"In sum, our proposals will provide positive incentives for these firms to shrink and to reduce their leverage, complexity and interconnectedness," he added.
He justified creating the proposed Consumer Financial Protection Agency, but said the administration would object to eliminating authority over the naked default swaps that got AIG into such trouble. "We don't think that banning…naked credit default swaps is necessary or appropriate to that objective (reducing risks)."
Secretary Geithner argued that the agency "will consolidate fragmented consumer authorities into one agency, the Consumer Financial Protection Agency (CFPA), which will write rules, oversee compliance, and address violations by non-bank providers, as well as banking institutions."
He said, "Effective protection requires consolidated authority to both write rules and conduct oversight and enforcement."
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