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Nov-04-2009U.S. lawmakers focus on size of big financial firms(topic overview)
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The legislation would not place any limit on how much taxpayer money the government could use to seize a major financial firm and would give Congress no say in any decision to use the money. After some lawmakers and regulators criticized the plans for the fund last week, Frank said he would make changes as his committee begins to wrap up the legislation this week. The Massachusetts Democrat said he expected the full House to vote during the first week of December on all components of the proposed overhaul of financial regulations, including creation of a new agency to protect consumers in the marketplace. As for the resolution fund, Frank said he would require firms to pay into it ahead of any use, as is now done by banks with the Federal Deposit Insurance Corp. fund that helps insure customer deposits. That way the money would be in place to cover the costs of seizing and dismantling a major financial firm, limiting the outlay of government money. Frank also said he favored '''some congressional involvement''' if the Treasury Department needed to lend any money to the fund to cover a shortfall before more money could be collected from the industry. '''It will not be an unfettered executive decision,''' Frank said. He suggested allowing any member of Congress to request a vote to stop a disbursement of taxpayer money into the fund. Rep. Brad Sherman (D-Sherman Oaks) has criticized the legislation for creating what he called a permanent, unlimited version of the $700-billion bailout fund. Though he said Frank was moving in the right direction with the proposed changes, he wants more details. [1] WASHINGTON -(Dow Jones)- U.S. House lawmakers are still mulling over a number of key issues on how to deal with the nation's largest financial-services firms, with the goal of passing legislation through the House of Representatives next month, a top Democrat said. Rep. Barney Frank (D, Mass.), who chairs the House Financial Services Committee, said he anticipates the various pieces of regulatory overhaul legislation that have been proposed will be voted on by the House in December. That includes creation of a new consumer financial protection agency, new regulations for derivatives, and new authority to deal with the largest financial firms. That measure would then have to be reconciled with similar measures being drafted by the Senate, which Frank said shouldn't be a problem. "I do not think you're going to have huge differences on this one," Frank told reporters at a press conference. He acknowledged that a number of important questions remain unanswered and that lawmakers are still trying to determine how to properly address the problem of financial firms that are considered "too big to fail." However, he predicted the package of reforms would address many of the weaknesses exposed in the last year. "This is not a one-shot operation.[2] WASHINGTON -(Dow Jones)- U.S. House lawmakers are considering ways to scale back the Federal Reserve's leeway in lending to specific institutions, a top Democrat said Tuesday. Rep. Barney Frank (D., Mass.), who chairs the House Financial Services Committee, said policymakers want to limit the central bank's wide-ranging authority to use its emergency power to lend to certain companies. He said lawmakers are considering ways to adjust the rules for the Fed to fund lending facilities. "No more Fed to AIG, no more Fed to Bear Stearns," Frank told reporters, referring to the central bank's specific loans to those firms last year.[2] Rep. Barney Frank (D-Mass.) on Tuesday said the House would vote on a wide-ranging financial overhaul no earlier than the first week in December. Frank, the chairman of the House Financial Services Committee, said that as part of the overhaul he is pursuing policies that would grant the federal government broad powers to break up large, troubled financial institutions and would curb the Federal Reserve'''s power to prop up specific firms.[3]
The legislation drafted by the Treasury Department and Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, gives the federal government power to regulate, seize and dismantle large companies whose failure poses a risk to the U.S. economy. It was hit from both directions at its first congressional hearing Thursday.[4] "No more Fed (money) to AIG. No more Fed to Bear Stearns," said Rep. Barney Frank, referring to two major recipients of the Fed's emergency lending program. The two provisions were expected to pass as part of a broader bill being considered this month by the House Financial Services Committee. The legislation would set tougher standards for firms that grow so large and influential that regulators determine their failure could bring down the entire economy. It also would let regulators seize failing institutions, wipe out their shareholders and dismantle companies before their collapse frightens investors.[5] WASHINGTON — Rep. Barney Frank says he expects a House bill will allow regulators to dismantle even healthy firms if they've grown so big that they threaten the broader economy. The House Financial Services Committee this week began work on legislation aimed at preventing the next Lehman Brothers, a giant financial institution whose bankruptcy helped to trigger the worst economic downturn in seven decades.[6]
WASHINGTON — In a sharp rebuke to Wall Street after a string of hefty bailouts last year, House Democrats are looking to prohibit the Federal Reserve from directly lending to failing institutions and empower regulators to break up even healthy firms if they are deemed too big to fail. The two provisions were expected to pass as part of a broader bill being considered this month by the House Financial Services Committee. The legislation would set tougher standards for firms that grow so large and influential in the market that their failure could bring down the entire economy.[7] Paul E. Kanjorski of Pennsylvania and Brad Sherman of California expressed concern at a committee hearing last week that the measure potentially would give the White House too much power in deciding which firms were "too big to fail." The bill, which Mr. Frank's committee is scheduled to debate and "mark up" this week, is part of broad push by the Obama administration to overhaul Wall Street's regulatory structure in the wake of last year's near collapse of the economy. The proposal, hashed out between Mr. Frank and the administration, would give the Federal Reserve the authority to step in and "wind down" failing nonbank financial firms deemed so large that their demise could bring down the economy.[8]
Waxman wants a totally different leadership structure on the proposed consumer protection agency. Republicans who will vote against his proposals anyway are happy to throw bombs on a daily basis, criticizing every aspect of the legislation. Then there's the White House -- the Obama administration would like Frank to hurry up and get things done so the administration can live up to its promise to reform Wall Street. Frank admits that the strain gets to him. "I did just sign a request from one of the members on the Republican side to travel to Afghanistan, and I said not only would I sign it but if he wanted to stay there we would be glad to provide him with additional funding," Frank said. The latest hitch for Frank came Tuesday, when he decided to spend much of the first day in committee on general debate over "systemic risk" regulation. Frank's decision came after a number of Democrats on his committee voiced concerns with the bill he unveiled last week. Late last week, Frank changed his mind on a key element of the systemic risk bill - how to fund a future government takeover of a failing firm. In the original bill, firms would have up to five years to pay the government for the cost of resolving their troubled competitor -- leaving taxpayers covering a what's likely to be a multi-billion-dollar tab in the meantime.[9] The House was supposed to be the path of least resistance on financial reform. Financial Services Chairman Barney Frank is fighting off attacks from the right and left on his legislation. He's priming for a House floor showdown with another Democratic chairman, Henry Waxman. His timeline on overhauling Wall Street regulations has slipped again and again. Frank's financial reform package is supposedly too big to fail, but his fellow Democrats aren't willing to bail him out as he weathers endless fights over arcane concepts like systemic risk and Federal Reserve lending restrictions.[9]
House Financial Services Committee Chairman Barney Frank is refuting accusations that a bill he helped author would lead to a rash of taxpayer-funded Wall Street bailouts. House members from both parties in recent days have complained that the measure, designed to avoid a repeat of the $700 billion Wall Street bailout, would still allow the federal government to pump rescue funds into failing banks. Mr. Frank told reporters Tuesday that any taxpayer money doled out under such circumstances only would be used to help dismantle the company - not to keep it afloat.[8]
"The kind of trading that AIG did will be mandated to be on the exchanges." The House Financial Services Committee and the House Agriculture Committee last month both approved similar bills aimed at shedding more light on the opaque over-the-counter market. The two bills would require dealer firms and major swap traders to process their swaps through clearinghouses, which guarantee trades, and execute transactions on trading venues. Amid concerns by the business community about the costs of posting cash margin to a clearinghouse, lawmakers on both committees carved out clearing and trading exemptions for companies that use swaps to mitigate risks such as interest-rate fluctuations. Frank has already tweaked his bill to address the CFTC's concerns that the new regulations might fail to capture big firms like Fannie Mae (FNM) and Freddie Mac (FRE), which could have a ripple-effect on the market if they fail. Despite that change, Gensler has stated publicly he still has lingering concerns that the two bills may not cover enough trades. At the very least, he said, hedge funds and non-bank financial firms should also be required to clear their swaps. Ideally, he'd also like to see commercial firms clear their swaps as well, and then be allowed to enter into individual credit arrangements with clearing members to address their worries about the cost of clearing. "I believe we can build upon these historic efforts and bring more transactions into these trading venues," Gensler said Tuesday at a speech before the International Emissions Trading Association.[10] WASHINGTON, Nov 3 (Reuters) - The government should have the authority to break up or reconstruct financial firms before they become "too big to fail," a prominent U.S. lawmaker said on Tuesday. The House Financial Services Committee is expected to start crafting legislation this week that would give the government a way to see all aspects of the financial system and unwind large troubled financial firms. Paul Kanjorski, chairman of the financial services subcommittee on capital markets, said he would introduce an amendment to the draft bill to prevent firms from becoming a threat to the wider economy. Kanjorski said financial firms should be reconstructed before they pose a risk to the financial system and the economy. He said breaking up firms was not the objective, as long as they do not reach the threshold of being deemed too big to fail. "We have to find a way of limiting firms from becoming too big to fail so they don't capture the government," he told reporters.[11]
Representative Barney Frank, chairman of a key U.S. congressional committee, told reporters that regulators could step in and reduce the size of troubled financial firms under a systemic risk oversight bill being debated by the panel. Earlier, Representative Paul Kanjorski, chairman of the House of Representatives capital markets subcommittee, told reporters he would soon introduce a measure to prevent firms from getting so large that they threaten the wider economy.[12]
As presented last week, the bill called for large financial firms to repay the U.S. Treasury Department on a case-by-case basis for Treasury loans used to finance government regulators' interventions to fix troubled financial firms. Committee Chairman Barney Frank on Friday decided he would no longer support that funding approach for the proposal, which is meant to deal with the question of financial mega-firms that markets have come to see as "too big to fail."[13]
Treasury Secretary Timothy Geithner told the committee that new powers were needed to prevent a repeat of the economic turmoil of autumn 2008. The government let Lehman Bros. fail, and the Federal Reserve stepped in to save American International Group because there was no process for the U.S. to take over large financial institutions and sell off their assets, as federal regulators can do with banks.[4] The Federal Reserve is designated in the legislation as the main regulator to oversee large, systemically important financial firms. That would allow the government to break up institutions and reduce them by size or other measures.[3]
The House Financial Services Committee, chaired by Rep. Barney Frank (D., Mass.), will begin considering Wednesday a measure that would give the federal government broad new authority to wind down the largest financial firms.[14] Frank, D-Mass., who chairs the House Financial Services Committee, said the latest bill might establish a separate facility funded by the Fed to provide emergency loans. "no entity would be allowed to borrow from that facility in times of a liquidity crisis unless they are very adequately capitalized," he told reporters. A separate provision, proposed by Rep. Paul Kanjorski, would give regulators pre-emptive powers to break apart any institution that has grown so large that its existence threatens the broader economy.[7] Frank, D-Mass., said the latest bill might establish a separate facility funded by the Fed to provide emergency loans. "no entity would be allowed to borrow from that facility in times of a liquidity crisis unless they are very adequately capitalized," he told reporters. Both measures still face scrutiny on the House floor and in the Senate, where Republicans hold more sway and Democrats are drafting their own legislation. As early as Monday, Senate Banking Committee Chairman Chris Dodd, D-Conn., was expected to outline his plan to overhaul the nation's financial regulations.[5]
WASHINGTON, Nov 3 (Reuters) - Congressional Democrats need more time to debate the funding for an Obama administration "resolution authority" bill for dealing with troubled financial firms, likely pushing committee consideration of the measure into next week, said lobbyists and a House aide on Tuesday. The bill was scheduled to be considered and possibly voted on this week.[13] WASHINGTON — House Democrats are balking at an Obama administration plan that would put taxpayers on the hook for up to five years to dismantle any giant financial firm whose failure could repeat last year's Wall Street collapse.[15] WASHINGTON — In a sharp rebuke of Wall Street after a string of hefty bailouts last year, House Democrats are considering legislation that would let the government break up even healthy firms if regulators think they've grown too big.[5]
The chairmen of two powerful U.S. House of Representatives panels signaled a willingness among Democrats in Congress to assert regulatory power to break up large firms and prevent threats to economic stability from financial institutions becoming "too big to fail." That could have major consequences for financial giants ranging from Goldman Sachs ( GS.N ) and JPMorgan Chase ( JPM.N ) to Morgan Stanley ( MS.N ) and Bank of America ( BAC.N ), all prominent survivors of last year's financial crisis.[16] The "resolution authority" proposal is part of a larger financial regulatory overhaul moving through Congress after the worst financial crisis in generations. In the Bush administration's confused handling of the crisis, some firms were allowed to collapse, such as Lehman Brothers, some got huge taxpayer bailouts, such as Citigroup ( C.N ) and American International Group ( AIG.N ), and some were acquired in government-engineered deals. President Barack Obama and congressional Democrats want to avoid another such episode by setting up a more orderly protocol for dealing with large non-bank financial firms that get into trouble. The resolution process they have proposed resembles the FDIC's process for handling troubled banks.[13]
The power was invoked at numerous critical turning points in the crisis, for example to aid Bear Stearns and American International Group (AIG). Frank said on Tuesday that he supports limiting that power so that the Federal Reserve cannot move directly to prop up specific financial firms.[3] "No more Fed to AIG, no more Fed to Bear Stearns," Frank told reporters, referring to the central bank's specific loans to American International Group Inc. (AIG) and Bear Stearns Cos. last year. "We are talking about some facility which might be funded with Federal Reserve money that would be available for solvent institutions," Frank said. -By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com (Fawn Johnson contributed to this article.)[17] Frank said lawmakers plan to put new constraints on the Federal Reserve, stopping the central bank's wide-ranging powers to lend to individual institutions.[17]
Treasury Secretary Timothy Geithner has said that '''resolution authority''' is one of the most important pieces of the overhaul. That paired with legislation that creates a new '''systemic risk council''' will be considered in markups that will likely last until the end of November, Frank said. Referring to the 1930s-era Glass-Steagall Act, which prohibited banks from doing both commercial and investment bank business, Frank said he could see the new systemic risk regulator imposing '''Glass-Steagall institution by institution.'''[3] "No more Fed to AIG, no more Fed to Bear Stearns," Frank said of the measure to restrain the Fed. Surprise, surprise: The Fed is not happy about that, with the Kansas City branch warning that giving more power to the Treasury "could lead to delays or second-guessing of supervisory recommendations and greater political interference." Barney's not too interested in discretion, consigning to the trash an agreement with the Obama administration to keep those firms deemed a systemic risk a secret.[18] The Obama administration last week proposed asserting a new level of government power to manage the risk and size of financial firms, but Frank and Kanjorki's comments appeared to place a new emphasis on size itself.[16] "If Congress decides to exempt some transactions by corporate end users, I believe the exemption should be explicit and narrow." Frank also told reporters he plans to change a provision in the bill giving clearinghouses the power to decide which swaps get cleared. That provision was sought by Gensler, but Frank said he now thinks it may create a loophole because many of the largest financial firms own a stake in clearinghouses and may not want certain swaps cleared or listed on exchanges. For-profit clearinghouses may also seek to bolster their volume and clear swaps at the expense of risk management.[10]
The congressional panel has approved a bill to regulate the $450 trillion over-the-counter derivatives market, after credit default swaps (CDS) were blamed for exacerbating the global financial crisis. Financial Services Committee Chairman Barney Frank said he wanted to change the bill to take authority to determine whether swaps are clearable away from private clearinghouses.[19] Now Representative Barney Frank, the chairman of the House Financial Services Committee, has suggested curbing the authority of the 12 Fed regional bank presidents.[20] The administration, through Treasury Secretary Tim Geithner, and House Financial Services Committee Chairman Barney Frank agreed last week to assess the costs of a government takeover on a failing company's competitors.[15] Chairman of the House Financial Services Committee Barney Frank (D-Mass.) told reporters at a press conference Tuesday that debate and markup of the Investor Protection Act will begin Wednesday and markup of other systematic risk legislation will follow.[21] "The refragmentation of financial markets is in nobody's interest." The U.S. lawmakers' comments came as Frank announced significant delays in consideration of the systemic risk bill by the House Financial Services Committee, which he chairs.[12] WASHINGTON -- A U.S. House panel will begin work on legislation this week to deal with systemic risks to the financial markets, though a final committee vote could take some time.[14]
Insurance industry sources said today that the Treasury Department and representatives of the U.S. Trade Representatives Office were meeting to discuss the jurisdictional issues raised by provisions in the legislation that would give the Treasury Department the authority to negotiate insurance trade pacts with foreign countries. He also said that the committee will finish work tomorrow on the Investor Protection Act, and start work on legislation establishing a mechanism for dealing with systemically risky financial services companies the same day. Rep. Frank said he will revise the draft legislation he developed with the aid of the Treasury Department.[22] The so-called resolution fund is a key part of legislation that Frank introduced last week following negotiations with the Treasury Department to give the government new power to avoid future financial crises.[1] Frank also discounted complaints from critics that a new resolution authority would create a permanent Troubled Asset Relief Program, the Treasury Department's $700 billion rescue fund enacted to deal with the financial crisis last year.[17] Top officials at the Treasury Department and on Capitol Hill have said the changes would address many of the weaknesses exposed during last year's financial crisis, when problems at individual firms had a contagion effect on the broader financial industry.[14]
During last year's financial crisis, the Fed invoked that power to try to spare major firms from collapse.[5] Frank supports giving the Fed power to create a separate facility that could be used in times of crisis to support parts of the financial industry, but not have the Fed lend directly to specific firms.[3]
Frank is currently weighing one of the thorniest aspects of the overhaul, a measure that would give the government new powers to regulate systemic risk and break up failing financial institutions that threaten the wider economy.[3] We are beyond the days of the breech- loading musket," Frank said. "This is the automatic rifle, the machine gun" dealing with multiple issues. He said it is unlikely, as suggested by some lawmakers, that it would be written into law that a new systemic risk council would have to break up the largest financial firms. The council would have the explicit mandate to step in when those firms are deemed to pose a risk to the broader economy and financial system, as well as when they falter. New capital requirements and other prompt corrective action efforts would be at the council's disposal, he said.[2] In a potential loophole, financial firms, which oppose the mandate that certain derivatives be traded, might have an incentive to not declare trades clearable, Frank told reporters. The change will likely face opposition from market participants who have said that clearinghouses should have the option to decline risky or hard to value assets if they are put at risk of failing themselves. 'If central counterparties are forced to clear something they don't feel comfortable with, we'd end up creating new systemic risk rather than reducing it,' said Kevin McPartland, senior analyst at TABB Group in New York.[19]
The proposal would allow the government to "pre-emptively" reconstruct firms that could pose risks to the country's financial health. "There are 15, 20 organizations that are probably, concededly, too big to fail, they would add systemic risk to the system," Mr. Kanjorski said. He added that "we have to find a way to limit them from getting too big to fail." That proposal would go further than the administration's plan to deal with systemically risky firms, which would rely on tougher regulations and capital requirements to give firms incentives not to get too big.[14] WASHINGTON (Reuters) - Two key U.S. lawmakers on Tuesday endorsed the idea of the government restricting not just the risks taken by big financial firms, but also their sheer size, echoing proposals being heard in Europe.[16] WASHINGTON, Nov 3 (Reuters) - The government should be able to restrict the size of financial firms so they do not become "too big to fail," two key U.S. Democratic lawmakers said on Tuesday, echoing proposals being made in Europe.[12]
A key question is whether to pre- or post-fund the cost of the government stepping in to deal with the failure of a systemically important financial firm. The original proposal worked on by Mr. Frank and the Treasury would allow the government to assess fees after a failure occurs, but a Frank aide on Friday said he now favors amending the measure to create a prepaid fund.[14] Frank's panel is schedule to begin debate Wednesday on the proposal to create a financial stability council made up of top regulators, as well as authorizing the government to wind-down the largest non-bank financial firms. A final panel vote is unlikely until next week, he said.[17] A bill debated on Tuesday by Frank's committee would empower regulators to reduce the size of troubled financial firms, Frank told reporters after a committee work session. Kanjorski said: "We have to find a way to limit them.[16]
Even as lawmakers took steps on Tuesday, President Barack Obama's push for financial regulation reform has a long way to go and its final outcome is unknown. Delays announced by Frank on Tuesday would likely kill any chances Congress will finish financial regulation reforms this year, a goal set by Obama. Frank said that instead of voting this week on the bill as planned, his committee is targeting a mid-November decision. He said a vote by the full House may not come until early December, two to three weeks later than planned.[16] House Financial Services Committee Chairman Barney Frank (D., Mass.) held a press conference Tuesday on efforts to overhaul financial regulation.[23] The head of the House Financial Services Committee said he plans to push through a whole sack full of new regulations changing the way Wall Street does business, or at the very least trying to change the way Wall Street does business, by next month.[18]
WASHINGTON/NEW YORK, Nov 3 (Reuters) - U.S. regulators should be given authority to determine whether a privately traded derivative contract should be cleared through a central clearinghouse, the chairman of the House Financial Services Committee said on Tuesday.[19] Lobbyists said Democrats on the U.S. House of Representatives Financial Services Committee disagree over how to fund the program and need to extend debate on it.[13]
A spokeswoman said the measure was still being drafted. Frank, who chairs the Financial Services Committee, said he expects the proposal and a similar one by Rep. Ed Perlmutter, D-Colo., to pass because of the risk mammoth institutions can pose to the economy.[5] The full House was expected to vote on the bill and other financial reform proposals in early December. Rep. Paul Kanjorski of Pennsylvania, a senior Democrat on the panel, wants to amend the bill so regulators could pre-emptively break apart any institution if they determine that its sheer size is a threat to the economy.[5] The bill would also allow regulators for the first time to take an overarching view of financial markets, assessing higher capital standards on certain firms if necessary.[14] Frank's bill already makes clear that regulators could dismantle failing firms. It also discourages companies from becoming too connected and influential in the market in the first place by requiring that they hold significantly more capital in reserve.[7] The measure also calls for large financial firms to help foot the bill to euthanize failing companies by paying into a reserve fund.[8]
Under the bill, the fund would be paid by financial institutions with total assets of at least $10 billion each only after a government intervention to repay the outlay of taxpayer money.[1] The federal government, for instance, has carved out $70 billion in taxpayer money so far to cover costs of unraveling the insurance conglomerate American International Group. At a hearing last week, several Democrats made their displeasure known. "No more bailouts," declared Rep. Luis Gutierrez, D-Ill. "Let them create the fund, the systemic risk fund, that will guarantee that the American taxpayer will no longer have to be involved should they cause such a crisis ever again."[15] A number of Democrats protested, saying that firms should pay up front for future bailouts. "Let create the fund, the systemic risk fund, that will guarantee that the American taxpayer will no longer have to be involved should they cause such a crisis ever again," declared Rep. Luis Gutierrez (D-Ill.) at a hearing last week.[9]
Some Democrats want to force financial firms to pay into a fund for future bailouts so taxpayers aren't on the hook. [9]
Mr. Frank initially wanted to collect money for the fund only after a firm was deemed to be failing. He switched his position to allow the fund to be prepaid, heeding the recommendation of Federal Deposit Insurance Corp. Chairman Sheila C. Bair and others. Mr. Frank also clarified actions and statements in recent days that suggested he was in favor of shielding the identity of struggling companies targeted for government aid, saying he was "misinterpreted." He said the confusion stemmed from his position to make public the names of those firms when they are awarded taxpayer money, but not before. "I said I want a public list, it was unclear apparently, so people acting on what they reasonably thought I was saying misinterpreted that, and I take responsibility for the garble," he said.[8] A spokesman for the chairman said last week that Frank would back having large firms make regular payments into a pre-established fund for unwinding troubled competitors. Frank has scheduled a press conference for Tuesday afternoon at which he is expected to discuss the issue. His shift last week aligned him with Federal Deposit Insurance Corp Chairman Sheila Bair, who argued in favor of firms prepaying into an established resolution fund, rather than paying case-by-case after the fact. Treasury Secretary Timothy Geithner said last week that after-the-fact funding would avoid the "moral hazard" of firms assuming that there is a pre-funded government "insurance" pool available to protect them from failure.[13]
Frank cited the Federal Deposit Insurance Corp.' s program to provide debt guarantees to the banking industry as the type of program lawmakers are considering. He said funding and criteria for such a facility remain open questions, but that any program "will not put the U.S. Treasury at risk."[17] There is, more or less, a Treasury plan, an FDIC plan, a Barney Frank plan, a Federal Reserve plan and so on and so on.[24] This fund would be large, but not in the 'hundreds of billions' of dollars. If the fund runs out because of an emergency and more money is needed, Congress would have to be involved before any money is appropriated by Treasury, he said. This could likely be in the form of an emergency liquidity facility from the Federal Reserve.[23]
When you're a nation getting ready to borrow $10 trillion or more over the next decade, you don't want markets questioning your central bank's commitment to controlling inflation. Congress continues to risk just such a scenario, whether through aggressively questioning Federal Reserve Chairman Ben Bernanke or pushing a bill to audit Fed monetary policy.[20]
AIG needed a government bailout out after selling hundreds of billions of dollars of protection on risky assets using CDSs. Frank said he and House Agriculture Committee chairman Collin Peterson are very close to a deal to merge both panel's bills.[19] Gensler "didn't want to be the one to have to decide" which swaps get cleared and listed on exchanges, Frank said, but "he can't pass off that responsibility." "He's going to have work with us because there is this fear that if you leave clearinghouses in charge of a procedure they will be self protective," Frank added. Frank said he has been working closely with House Agriculture Committee Chairman Collin Peterson (D, Minn.) to meld the two derivatives bills together before the full House votes on them.[10]
Senate Banking Committee Chairman Chris Dodd (D-Conn.) is drafting legislation behind the scenes, and an administration official said on Tuesday that the Senate is not far behind the pace set in the House. Dodd publicly has taken several positions that differ from the administration and Frank, most notably that he is in favor of the consolidation of the nation'''s four banking regulators.[3] A spokesman for Mr. Frank said that a final committee vote on the legislation could slip based on the schedule of the broader House of Representatives and the number of amendments that are eventually considered.[14]
Following the consideration of the Investor Protection Act of 2009, the committee will begin markups of the Federal Insurance Office Act of 2009, the Financial Stability Improvement Act of 2009 and the Overdraft Protection Act. Frank added that he expects aspects of the larger financial regulatory reform legislation, including the creation of the Consumer Financial Protection Agency, to be voted on by December.[21] Financial Services Chairman Barney Frank is fighting off attacks from the right and left on his legislation.[9]
Industry officials also say that paying after the fact would give companies an incentive to self police. Geithner testified last week that creating an insurance fund with prepayments would also increase the danger that companies would act recklessly, because they would know that a fund was there to assist them. "We don't want to create that expectation," he told the Financial Services committee on Thursday.[15]
Committee debate on the proposals begins tomorrow. While Congress and the administration have done basically nothing this year to respond to the alleged systemic problems underlying the financial crisis, Frank aims to fix everything in a holiday flurry of activity.[18] The systemic risk measure is a key piece of the broader financial regulatory overhaul effort being undertaken by Congress and the Obama administration.[14] '''The systemic risk regulator, I believe, will be given explicit mandates to step in when there is a troubled institution,''' Frank said.[3] The systemic risk council would have a say in the creation of the facility that would spread the political accountability to a wider array of regulators for making the decisions. His comments tap into a broader debate about whether the government should have the power to break up large institutions.[3]
In some cases defaults can occur before sufficient collateral payments can be made. 'There's a fairly significant risk that if a regulator decides they have to clear something and can set capital or otherwise determine how to appropriately clear a product, we have succeeded in just pushing risk to clearing corporations and raised the risk that they may not have adequate capital,' said Paul Forrester, partner at law firm Mayer Brown in Chicago. 'That's a potentially larger problem than the one we're trying to solve,' he said. Executives at CME Group Inc and LCH.Clearnet, both of which plan to clear credit default swaps, have said they are wary of clearing contracts that trade infrequently or have few pricing sources. Frank said he also requested the change in a letter to CFTC Chairman Gary Gensler.[19] Some legislators faulted it for being too expansive, while others said it did not go far enough. Regulators such as Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., objected to some provisions as well. Despite the concerns, Frank said he hoped his committee would vote on it this week. He admitted there would be changes.[4]
Dodd was likely to give the Fed less power than Frank's proposal and merge bank supervision under a single regulator.[5] The bill imposes tougher capital requirements and would allow regulators to step in if it begins to fail. Frank, who chairs the panel, told reporters on Tuesday that he expects the bill will be amended to give regulators pre-emptive powers to prevent any company from becoming too big in the first place.[6] Under Frank's bill, private clearinghouses, some of which are owned by financial institutions, have the power to determine whether a swap can be cleared.[19] Frank also said trading between financial institutions will need to be made on exchanges, without exemption. This rule would cover all banks that have traded with American International Group ( AIG - news - people ), which he deemed 'the poster child' of derivative problems.[19] Large financial institutions oppose an upfront payment. They say new proposed regulations would already place a financial burden on them by requiring that they avoid over-leveraging by keeping more capital on hand.[15]
Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm that advises financial institutions, said in an interview that upfront payment is a better policy.[15]
In London, some financial firms that were propped up by the government will be partially broken up. Royal Bank of Scotland ( RBS.L ) was forced to sell chunks of its retail bank to meet European state aid rules.[11] The situation led Congress to enact the Bush administration's $700 billion Troubled Asset Relief Program, or TARP, to rescue failing financial firms.[8] Financial companies with more than $10 billion in assets would be assessed under the "resolution authority" program proposed by Frank and the Obama administration.[13] The administration's plan, contained in draft legislation introduced last week, would recoup government costs of unwinding a failed institution from companies with assets of $10 billion or more.[15]
The bill places no limit on how much the government could spend after stepping in to prevent a bankruptcy, and it lets federal officials use government money to let the company continue in business. "I'm not a man that fears this administration or you, but I do fear the accumulation of power exercised by someone in the future that can be extraordinary," Rep. Paul Kanjorski, D-Pa., told Geithner.[4] Sherman said there was a major difference between a congressional vote to prevent the disbursement of money and one authorizing it. Under the first option, a bill to prevent Treasury from lending money to the fund could be vetoed by the president, which would require a two-thirds majority of both houses to override. Requiring Treasury to seek congressional approval for any disbursement would mean that only a simple majority of both Houses would be needed to stop it. He said the committee debate on the bill would be important in structuring that mechanism.[1] "The most important thing is to make sure that we are building a new framework that creates no presumption that firms will be bailed out and that protects taxpayers from having to foot the bill for failures," White House spokeswoman Jen Psaki said.[15]
The debate is hardly a simple accounting exercise. It goes to the heart of how government holds the industry accountable, how policy affects financial recklessness, and, perhaps most important, how far the executive branch should go in making taxpayers foot the bill for private sector failure, even if for a limited time.[15] "We are preparing an amendment to give authority to reconstruct organizations that are determined to be too large to fail," Kanjorski told reporters. "We have to find a way to limit them from becoming too big to fail so they don't capture the government." In a possibly sweeping assertion of government power over the financial industry, the idea of keeping mega-firms to a manageable size is spreading on both sides of the Atlantic.[12] Lawmakers have also raised other issues. Rep. Paul Kanjorski (D, Pa.), who chairs a key subcommittee, said Tuesday that he will offer an amendment giving the government the authority to break up large financial corporations.[14]
One reason the Fed has a decentralized structure is because of historic concerns about monetary policy serving only Washington and Wall Street. Citizen concerns about the concentration of financial power are as alive today as they were in 1913 at the Fed's creation. Monetary policy set solely by a presidentially-appointed and Senate-confirmed Board of Governors should certainly set off alarm bells with bond vigilantes concerned that Washington may try to inflate its way out of its debt problems. If Congress wants to look at how the Fed conducts its'' business, better to focus on better ways to make monetary policy reflect forward-looking market gauges such as commodity prices rather than the unemployment rate or output. [20] He'''s priming for a House floor showdown with another Democratic chairman, Henry Waxman. His timeline on overhauling Wall Street regulations has slipped again and again.[9] Some Democrats said the plan did not go far enough, contending that the government should be able to break up companies and that it should collect money from Wall Street in advance to cover taxpayers in the event of failure.[4] Republicans and some Democrats said the proposal gives the government too much power to intercede in the private marketplace and spend taxpayer money.[4]
The companies would have 60 months after the fact to pay. Angry that such a plan would make taxpayers the first line of defense when a company implodes, Democrats now plan to propose making large firms prepay premiums into a special fund that would be tapped when calamity strikes, Frank's spokesman said Monday.[15] Barney Frank also fought tooth and nail against any and all efforts to regulate Fannie Mae and Freddie Mac and the other government lending institutions. Barney and company is the LAST person to be in his position making decisions for the TAXPAYERS.[9] "No more Fed (money) to AIG. No more Fed to Bear Stearns," said Rep. Barney Frank, referring to two major recipients of the Fed's emergency lending program.[7] Barney Frank buys off the Ethics Committee with Campaign money. Barney is safe, the Mass voters like thieves and he helped bring them the big dig along with Kennedy.[9]
Mr. Buffet compares it to insuring against natural disasters, where many loss-free years can be more than wiped out by one devastating experience. Barney Frank led the wailing of those pushing banks and other institutions to give mortgages and loans to people who could not afford them or who probably would not pay them back even if they could.[9] Financial-sector regulators have similar authority over traditional banks but were powerless last year when Lehman Brothers investment bank and insurance giant American International Group Inc. faced collapse.[8] Cutting big international banks down to size would not solve the problems highlighted by last year's crisis, Deutsche Bank ( DBKGn.DE ) Chief Executive Josef Ackermann told a regulatory conference in London on Monday.[12]
As lawmakers thrash out ideas for tightening bank and capital market regulation following the worst financial crisis in decades, bankers raised the alarm.[12] Our rules and regulations should help provide efficiencies and reduce the costs of information to the public. These rules and regulations will not stop individuals and organizations from taking too much risk or from possible financial dislocation.[24] After a company's assets were sold, any taxpayer costs would be paid by other large and medium-sized companies through assessments. The plan also would allow tougher requirements on large financial companies to reduce their risk of failure and make it less attractive to become so large.[4] Clearinghouses concentrate the exposures of large trading counterparties, and pose large risks to the financial system if they are undercapitalized. Derivative contracts can be used to hedge against or bet on the changes in value of the underlying assets such as stocks, bonds, commodities. Enforcing margin requirements on many derivatives, such as credit default swaps, can be challenging as the value of the contracts can rapidly change if a borrower is suddenly deemed near default.[19]
The way to eliminate excessive risk taking is to eliminate all risk. I wrote a letter to the government telling them that risk has no place in our financial system, that returns should be based on a general fairness doctrine. Anyone who takes risk should have to forefeit the profit they make in doing so to those that, prudently, don't take any.[18]
Republicans were expected to oppose several provisions, including the establishment of a new government agency dedicated to protecting financial consumers.[5] Trying to explain that finance is another form of information and that financial innovation cannot really be controlled is difficult to do when the public sees all the perks and benefits that are associated with financial wealth. The second reason is that politicians have difficulty claiming that government might be the root cause of the problem, especially when they have been a part of that government. Those that govern very seldom support the argument that government might be a cause of difficult times because government is so often looked upon as the solution to the problems we encounter, especially when the problems are of national or international scope.[24] We need economies that do not contribute to a covering-up of transactions whether it be for tax or flows of funds purposes (see the Financial Times, " Leading Economies Blamed for Fiscal Secrecy ") or whether it be for deals (see the Financial Times, " Trading in European ‘Dark Pools’ leaps Fivefold since the start of the year "). Controls, prohibitive restrictions, price limits and artificial scarcities all lead to "black markets," whether the products and services are goods or whether they are just information.[24] Kanjorski's potential amendment will face deep resistance from large financial services firms. "The fundamental error of such an approach is the presumption that large is somehow bad," said John Dearie, executive vice president at the Financial Services Forum, a group of financial services firm chief executives.[11] The idea of holding financial firms to a manageable size is also gaining favor in Europe.[16] Any aid provided to a large, failing financial firm will be paid for by industry participants.[17]
The power is known in the financial industry as '''13(3)''' for the section of the statute that created the authority.[3] Insurance industry sources said today that the Treasury Department and representatives of the U.S. Trade Representatives Office were meeting to discuss the jurisdictional issues raised by provisions in the legislation that would give the Treasury Department the authority to negotiate insurance trade pacts with foreign countries.[22] Rep. Frank said he will revise the draft legislation he developed with the aid of the Treasury Department.[22]
"I think we're going to be able to come together on a common bill," Frank said. Frank also said that the CFTC and the Securities and Exchange Commission will be the final arbiters of whether companies can be exempt from clearing and trading requirements. - By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com (Fawn Johnson contributed to this article.) [10]
Frank was responding to critics, including U.S. Commodity Futures Trading Commission Chairman Gary Gensler, who have said the proposed new regulations are too lax and should require all routine swaps to be cleared and traded on transparent platforms.[10]
Separately, Frank struck a tough tone on the scope and power of the Federal Reserve.[3] Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics.[23] Democrats also want to prohibit the Federal Reserve from directly lending to failing institutions.[5]
Frank even commissioned and publicized a study that found that 97 percent of the hawkish dissents at Federal Open Market Committee meetings during the past decade were from the regional bank presidents. [20] '''We will start the markupbeginning tomorrow, and everyday that the House is in session until we finish,''' Frank said.[21]
From time to time, we will send you e-mail announcements on new features and special offers from The Wall Street Journal Online. [14] Recently unveiled legislation to address potential failures of large financial companies might not survive without significant changes.[4] There are signs that the systemic risk proposal could undergo a number of changes.[14]
Of course, higher rates would have been a good thing, given that the Fed's extraordinarily easy monetary policy was a huge contributor to the financial crisis. [20] The two largest UK retail banks -- Royal Bank of Scotland ( RBS.L ) and Lloyds Banking Group ( LLOY.L ) -- secured more government aid on Tuesday and agreed to sell branches and businesses to appease European Union competition concerns over state aid. EU regulators are considering measures to force banks across Europe to sell assets and sometimes even to break up to compensate for massive state aid they have received.[16] Kanjorski, a senior Democrat on the panel from Pennsylvania, wants to amend the bill to empower regulators to curb the size of a company.[7]
SOURCES
1. Frank says financial industry should pay now for future bailouts | Money & Company | Los Angeles Times
2. US Rep Frank: Will Limit Fed's Lending Leeway
3. Frank: House won'''t vote on financial overhaul until Dec. - TheHill.com
4. Business-failure bill''' draws many critics | ajc.com
5. The Associated Press: House bill to go after any large financial firm
6. The Associated Press: House bill to go after any large financial firm
7. The Associated Press: House bill to curb Fed lending power
8. Frank defends banking measure - Washington Times
9. Financial reform fight heats up House - Victoria McGrane - POLITICO.com
10. UPDATE: US Rep Frank Defends Derivatives Regulation Bill
11. UPDATE 2-US lawmaker favors curbing size of financial firms | Reuters
12. WRAPUP 1-Big bank containment strategy catches on in US, EU | ETFs | News | Reuters
13. 'Too big to fail' bill hits speed bump in Congress | Deals | Regulatory News | Reuters
14. House Panel to Begin Work on Systemic Market Risk Bill - WSJ.com
15. The Associated Press: Taking down failures: Who pays, when and how much?
16. U.S. lawmakers focus on size of big financial firms | Reuters
17. UPDATE: US Rep. Frank Sees Dec Floor Votes On Financial Rules
18. Barney Frank Wishes Wall Street A Very Merry Christmas - Dealbreaker - A Wall Street Tabloid - Business News Headlines and Financial Gossip
19. UPDATE 2-US's Frank wants SEC/CFTC to decide on swaps clearing - Forbes.com
20. James Pethokoukis » Blog Archive » Barney Frank's wrongheaded assault on the Fed | Blogs |
21. House Financial Services Committee To Start Markup Of Systematic Risk Bill Wednesday Talk Radio News Service
22. No Finance Reform Bill Action Until December Rep. Frank Says - Regulation/Legislation - Property and Casualty Insurance News
23. Barney Frank On Financial Regulation Overhaul - Real Time Economics - WSJ
24. New Financial Regulations: More Harm than Good? -- Seeking Alpha
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