Obama seeks new powers to dismantle nonbank firms

Associated Press Writer
October 29, 2009

WASHINGTON – A year after Lehman Brothers collapsed, helping to trigger the worst financial crisis in seven decades, the Obama administration is pressing Congress for the power to dismantle other nonbank firms considered so large and influential that they could bring down the entire economy.

Treasury Secretary Timothy Geithner was asking a House panel on Thursday to pass legislation that would enable federal regulators to identify and monitor big financial firms and step in to wind them down before they collapse.

The proposal, worked out in an agreement with House Financial Services Committee Chairman Barney Frank, D-Mass., also will give new powers to the Federal Reserve to enforce tougher requirements for these “too-big-to-fail” companies.

The bill is aimed at preventing another Lehman situation in which government officials watched helplessly as nervous investors withdrew funds from money markets and credit lines froze.

The alternative would have been a hefty federal bailout, which the government later approved for insurance giant American International Group — another influential financial firm outside regulators’ control because it wasn’t a bank.
Democrats are largely behind the plan. But Republicans say it will create the expectation that certain companies are so big that the government won’t allow them to fail and will always rescue them with taxpayer dollars.

Democrats and the administration counter that the proposal would prevent future bailouts by insisting that large companies hold more capital in reserve. And if a firm does fail, the government would be able to sidestep a bailout by dismantling the company in such a way that it would minimize the economic impact.

“We may disagree over details of how to best fix those flaws, but that cannot mean we do not act,” Geithner told lawmakers when he testified last.

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