Geithner Defends Resolution Authority Plan; Bair Raises Objections

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

Proposed new authority that would allow the government to step in and resolve large, failing financial institutions would not result in a category of firms deemed too big to fail, Treasury Secretary Tim Geithner assured Congress on Oct. 29, 2009. Geithner told the House Financial Services Committee that the proposed legislation, announced a day earlier by the Treasury Department and the committee, would mean that if systemically important firms got themselves in the position where they could not survive on their own, “then the only authority we would have is to manage their failure.” Committee Chairman Barney Frank, D-Mass., said he hoped to mark up the legislation next week.

Geithner stressed that the bill would not provide a government guarantee for troubled financial firms, create a fixed list of systemically important firms or provide a permanent Troubled Asset Relief Program (TARP)-like authority. In addition, “it does not give comfort to investors, creditors, counterparties, or management that the government will be there to absorb losses from risky business strategies,” he said.

“Without the ability for the government to step in and manage the failure of a large firm and contain the risk of the fire spreading we will be consigned to repeat the experience of last fall. It’s a really stark, simple thing,” Geithner told lawmakers, some of whom are concerned with what they view as increased government intervention in the financial markets.

Republican committee members criticized the proposal. Ranking Member Spencer Bachus, R-Ala., said the proposal put taxpayers first in line to bear the costs of dissolving large financial firms, while Rep. Brad Sherman, D-Calif., described the proposed legislation as “TARP on steroids.”

Disagreements Among Regulators

Federal Deposit Insurance Corporation Chairman Sheila Bair disagreed with how the bill would pay for resolving insolvent institutions. Bair urged the creation of a Financial Company Resolution Fund, pre-funded by levies on larger financial firms, in order to fund the resolution process. Treasury and Frank have proposed that if the assets of a failed institution were insufficient to fund the receivership, assessments then should be levied on a range of large firms to make up the difference. Geithner argued that a standing fund would create an expectation that the government would step in to protect shareholders and creditors from losses and would be viewed as a form of insurance.

Bair also asserted that the proposed oversight council would lack sufficient authority to effectively address systemic risks. Appropriate safeguards need to be established to preserve the independence of financial regulation from political influence, she said, and to that end she is proposing that the chairman of the council be a presidential appointee subject to Senate confirmation, not the Treasury Secretary.