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Financial Planning > Charitable Giving

Frank: Kill Ailing Giants

By Arthur D. Postal

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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.

“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.

“In sum, our proposals will provide positive incentives for these firms to shrink and to reduce their leverage, complexity, and interconnectedness,” Geithner said.

Geithner defended the need to create a Consumer Financial Protection Agency, which he said would “consolidate fragmented consumer authorities” and “write rules, oversee compliance, and address violations by non-bank providers, as well as banking institutions.”

Insurers are concerned about the CFPA because the administration has called for the CFPA to regulate some credit-related insurance products.

The National Association of Insurance Commissioner, Kansas City, Mo., has objected to the idea of giving the new agency oversight over any insurance products.

Geithner said combining regulatory authorities “will ensure that the agency has a wide range of tools to address any problem within its domain, and can choose those that are most effective and impose the least burden.”

To fix the problems that created the recent financial crisis, “you need to have strong, minimum national standards for protection that need to apply not just to banks, but to institutions that compete with banks in the business of providing credit,” Geithner said. “They need to be enforced effectively, consistently and fairly.

But Geithner said the administration would object to efforts to eliminate naked default swaps – the credit protection arrangements that proved to be a popular vehicle for speculators and got AIG into so much trouble.

“We don’t think that banning … naked credit default swaps is necessary or appropriate,” Geithner said.

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