BOSTON - Big banks will not be
forced to downsize and the public will be the last to know when they
fail, a controversial bill unveiled by U.S. Treasury Secretary Timothy
Geithner and Congressman Barney Frank proposes.
The long-awaited "too
big to fail" legislation was roundly criticised during a congressional
hearing Thursday as a nod to the biggest financial firms in the U.S.
is TARP on steroids," said Rep. Brad Sherman, a Democrat, referring to
the U.S. Treasury programme that gave trillions to financial companies.
The legislation was called for by Congress and President Barack
Obama in the wake of the trillions recently spent by the U.S.
government to rescue behemoth financial institutions like AIG and Bank
of America, out of fear that their failure would bring down the whole
"Taxpayers simply must not be put in the
position of paying for losses incurred by private institutions," Obama
said in a letter to Frank this week praising the legislation. "When
major financial firms fail, government must have the ability to
dissolve them in an orderly way, with losses absorbed by equity holders
Leading up to the bill, many economists on the
left and the right said the only way to protect the finance system and
consumers is to break up the gargantuan finance companies that now
exist. Former Federal Reserve chairmen Paul Volker and Alan Greenspan,
and former labour secretary Robert Reich all favour this approach.
a result of the mergers and acquisitions during the past 18 months,
Bank of America, CitiGroup and J.P. Morgan Chase now control about
one-third of U.S. finance and bank business, analysts say.
"The Wall Street giants should be split up - and soon," Reich said.
the bill does not propose breakups, and instead takes a more "subtle"
approach, current Federal Reserve Chairman Ben Bernanke told reporters.
says this is a mistake. U. S. Treasury Secretary Timothy Geithner and
financial advisor Lawrence Summers "continue to bend over backwards to
make Wall Street happy, and in doing so continue to risk the
credibility of the president, as well as the long-term financial
stability of the system," Reich said.
The bill probably will not
be sorted out in time for the next round of bailouts. GMAC, the former
financial arm of General Motors, is in line for its third government
handout and CitiGroup is reportedly still on shaky ground. GMAC has
already received 12.5 billion dollars from Uncle Sam and CitiGroup, 45
GMAC, like other businesses, made itself
eligible for a government bailout by purchasing a bank last year, and
becoming a bank holding company.
The bill was criticised at a
Thursday hearing by Frank's House Finance and Banking Committee, by
Democrats and Republicans, and even an Obama administration official.
said the bill would grant the Federal Reserve and U.S. Treasury the
authority to bail out institutions in unlimited amounts without the
approval of Congress.
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"We are given no authority to limit the
biggest institutions but we are allowed to help them when they fail?"
said Democrat Rep. Paul Kanjorski, calling for the bill to allow
downsizing of big financial firms.
Under the bill, sprawling
bank-holding companies would continue business as usual, unless in
trouble. The bill would not allow any new bank holding companies to be
A new government oversight council, led by the
Treasury secretary, would watch for danger signs in the finance system
as a whole, and identify firms at risk of failure, referred to as "the
list" by Frank. The firms would be subject to heightened regulation,
and monitored closely by the Federal Reserve. Investors and other
business parties, and possibly Congress, would be alerted to firms on
"the list", but not the public.
"Even a cursory reading shows
that the administration has chosen to continue its failed policy of
costly taxpayer bailouts orchestrated behind closed doors by officials
at the Treasury and the Federal Reserve," said Republican Rep. Spencer
"The legislation keeps the names of the 'too big to
fail' firms secret. It allows the picking of winners and losers behind
closed doors," said Republican Rep. Randy Neugebauer.
If a firm
fails and can't pay back its loan, the FDIC would step in and attempt
to dismantle it in an orderly way, outside of bankruptcy. Solvent firms
of 10 billion dollars or greater would be assessed a tax to pay for the
cost of the failed institution.
Sheila Bair, chief of the
Federal Deposit Insurance Corporation, the entity that regulates
community banks, criticised the bill.
"The oversight council
described in the proposal currently lacks sufficient authority to
effectively address systemic risks," Bair said at the hearing. It
should be led by a presidential appointee, not the Treasury secretary,
A very controversial part of the bill is the authority
that would be granted to the Federal Reserve to act apart from the
council and Congress, and to bail out troubled firms or solvent firms
with unlimited amounts of U.S. government funds, with quiet approval
from the Treasury.
The Federal Reserve is a quasi-government
entity, that helps direct U.S. monetary policy but is governed by its
members - private banks and financial firms. It operates with great
secrecy, and is not required to disclose the loans it makes to firms,
estimated to be in the trillions during the past two years.
for Financial Reform, a broad coalition of labour and consumer
organisations, opposes the bill because of the greater autonomy granted
to the Fed, Richard Trumka, president of AFL-CIO trade union, told
Frank. The Fed was in charge during the meltdown of the past 18 months,
"Instead of repeating and deepening the mistakes
associated with the bank bailout, Congress should be looking to create
transparent, fully publicly accountable mechanisms for regulating
systemic risk and for acting to protect our economy in any future
financial crises," Trumka said.
The committee may vote on the bill next week, though no similar legislation has yet been drafted in the Senate.