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Panel votes to limit taxpayer exposure in 'too-big-to-fail' bill
Lawmakers expect to cap fund to dismantle a big failed bank at $200 billion
By Ronald D. Orol, MarketWatch
Last Update: 4:34 PM ET Nov 17, 2009
WASHINGTON (MarketWatch) -- Legislation mandating broad regulatory reform in the banking industry continued to take shape on Tuesday with lawmakers approving limits on the amount of taxpayer funds that could be used to dismantle "too-big-to-fail" insolvent financial institutions.
The House Financial Services Committee made other changes to the bank reform bill, including alterations to the structure of the Federal Reserve.
The legislation seeks to amass funds from large financial institutions and hedge funds that would be used to make payments to creditors and counterparties of a large failing financial institution so that its collapse does not lead to their collapse, further unsettling the financial markets.
Lawmakers approved a measure that would require funds from large financial institutions be used to pay to cover the costs of dismantling a financial institution.
"Wall Street companies and executives should have to pay for their own mistakes," said Rep. Paul Hodes, D-N.H., the provision's author. "This amendment ensures that financial companies, not taxpayers, will resolve the company."
According to committee spokesman Steven Adamske, the provision would not prohibit Congress from allowing bank regulators to initially use taxpayer funds to dismantle an institution as long as those costs would be recouped later from the financial industry. He added that the committee will consider the details of the funding later this week.
The White House and many lawmakers on Capital Hill, including Senate Banking Committee Chairman Christopher Dodd, D-Conn., the author of too-big-to-fail legislation in the Senate, are seeking to allow Congress to permit bank regulators to use taxpayer funds first to dismantle a failed institution and later recoup those costs from the industry.
Rep. Barney Frank, D-Mass., the committee's chairman, said he expects to support an amendment that is expected to be introduced later this week that would cap the amount that can be collected from financial institutions to $200 billion.
"The cap we have is $200 billion," Frank said.
Who would pay?
The Frank legislation would have financial institutions with $10 billion in capital or more pay fees to fund the pool of capital that could be used to unravel a failed supersized bank. Frank added that each institution will be assessed based on their size, interconnectedness and general riskiness. Roughly 120 financial institutions would be assessed fees had the provision been in effect today.
However, Rep. Brad Sherman, D-Calif., is expected to introduce a provision that would only have really large institutions with $75 billion, adjusted for inflation, pay into the fund. It's unclear whether lawmakers will support Sherman's measure or stick to the original legislation.
Changes at the Fed
The committee also approved an amendment introduced by Rep. Gary Peters, D-Mich., that would reduce the power of the presidents at the Federal Reserve's 12 regional banks, placing more authority in the hands of presidentially-appointed and senate confirmed Federal Reserve Board of Governors. A similar provision was introduced by Dodd in the Senate.
According to the amendment, the Fed's board of governors would be prohibited from delegating the authority to make any voting decisions to the presidents of the Federal Reserve banks. At issue is Peters' concern about a lack of independence among regional Fed banks because their boards are made up, in part, of members of the banking community. The regional Fed bank boards, which also include members of the general public, pick their presidents. Peters said he didn't want the 12 regional bank presidents to have too much power over key decisions made by the central bank.
"We expect that voting authority to go to presidentially-appointed, Senate-confirmed board of governors of the Federal Reserve System," Peters said.
Axe the board too
Lawmakers also approved a provision that would remove a dismantled, insolvent supersized financial institution's board, in addition to its top management.
The legislation had previously only sought to have a failed institution's management removed.
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