Geithner says plan won’t lead to more bailouts

Treasury Secretary Timothy F. Geithner says that bankruptcy - not taxpayer-funded bailouts - will be the federal government’s primary response to failing Wall Street firms in the future.

“In all but the rarest of cases, bankruptcy will remain the dominant tool for handling the failure of nonbank financial firms,” Mr. Geithner told the House Financial Services Committee on Thursday.

The secretary was testifying before the panel to push for legislation introduced by the committee this week that would give the federal government the power to “wind down” failing nonbank Wall Street firms so large that their demise could collapse the economy.

The proposal, worked out between the Obama administration and the committee’s chairman, Rep. Barney Frank, Massachusetts Democrat, would give the Federal Reserve the power to step in and dismantle failing large firms before they collapse.

Regulators have similar authority with traditional banks but were powerless last year when investment bank Lehman Brothers and insurance giant American International Group faced collapse. The situation led Congress to enact the Bush administration’s $700 billion Troubled Asset Relief Program, or TARP, to rescue failing financial firms.

The bill calls for the government to front the cost to dismantle a failing company. If the firm doesn’t have enough assets to repay the government, regulators would assess a fee to other firms with more than $10 billion in assets.

Mr. Geithner and Mr. Frank denied Republican accusations the bill would lead to the government bailing out select companies deemed “too big to fail.”

“There will be death panels enacted by Congress this year, I hope, but they will be for those large [failing] institutions which will be put out of business,” Mr. Frank said.

Mr. Geithner said the legislation is needed because, as the collapse of Lehman Brothers showed, the current bankruptcy code “is not an effective tool for resolving the failure of a complicated financial services firm in times of severe economic stress.”

Committee Democrats mostly approve of the measure. Republicans say they aren’t convinced it provides enough safeguards against future Wall Street bailouts.

Many financial service sector regulators, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS), also say they have some concerns about the plan.

FDIC Chairman Sheila Bair, in a prepared statement to the panel, said that a proposed “council of regulators” designed to plug gaps in the oversight of Wall Street - currently spread out among several agencies - “lacks sufficient authority to effectively address systemic risks.”

OTC Acting Director John E. Bowman told the panel that he opposes a provision in the bill that would merge his agency with the Office of the Comptroller of the Currency.

Wall Street also has significant concerns about the plan.

The panel’s top Republican, Rep. Spencer Bachus of Alabama, complained that the committee, which received the draft of the bill Tuesday, doesn’t have enough time to review it and offer changes before a planned markup next week.

“The administration’s desire to get something - anything - done to satisfy some arbitrary deadline imposed on the chairman will result in this committee passing a product that has not received the careful deliberation necessary to ensure sound legislation,” he said.

“It’s worth taking the time to get it right.”