WASHINGTON BUREAU — House Financial Services Committee Chairman Barney Frank, D-Mass., today committed his panel to passing a bill that would give federal regulators the authority to take over–and liquidate–troubled non-bank financial institutions such as American International Group Inc.
“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,” Frank, D-Mass., said at a committee hearing that gave Treasury Secretary Timothy Geithner a chance to discuss Obama administration financial services regulatory reform proposals.
“I say that because we have this euphemism that we are going to be ‘resolving’ these institutions,” 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. We are talking about making it unpleasant for the entities. This is not a fate people will want.”
Geithner said he does not support Frank’s proposed emphasis on liquidation. In some cases, he argued, the government may still need the flexibility to bail out companies that are too big to fail.
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“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. … 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.”
Geithner said the Obama administration’s proposals regarding regulation of large bank and non-bank financial institutions, including AIG, New York, would have “powerful effects.”
The proposals would force large financial firms to pay an appropriate regulatory price for the risks that their failure or distress could impose on the broader financial system, Geithner said.
The Obama plan also would “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,” Geithner said.