Both sides scrutinize bailout-deterrent bill

Lawmakers from both parties are concerned that an Obama administration-backed bill intended to deter future taxpayer-funded Wall Street bailouts would have the opposite effect and give the White House too much power over the nation’s financial sector.

Some House members are worried the measure would allow the federal government, under certain circumstances, to pump rescue money into failing Wall Street giants with little or no input from Congress - potentially leaving taxpayers on the hook for billions of dollars.

“I’m not a man that fears this administration or you,” Rep. Paul E. Kanjorski, Pennsylvania Democrat, told Treasury Secretary Timothy F. Geithner during a congressional hearing Thursday. “But I do fear the accumulation of power exercised by someone in the future that can be extraordinary.”

The proposal, hashed out between the administration and House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, would give the Federal Reserve the authority to step in and dismantle failing nonbank financial firms deemed so large that their demise could bring down the economy.

Financial-sector regulators have similar authority with traditional banks but were powerless last year when Lehman Brothers investment bank and insurance giant American International Group Inc. 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.

Mr. Geithner says that under the terms of the bill, bankruptcy - not taxpayer-funded bailouts - would be the federal government’s primary and preferred 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,” said Mr. Geithner during a House Financial Services Committee hearing on Thursday.

Not all on Capitol Hill say they are convinced.

“I strongly agree with well over 90 percent” of the bill, said Rep. Brad Sherman, California Democrat. “Unfortunately, you’ve got in here what I call TARP on steroids. You’ve got permanent, unlimited bailout authority.”

Mr. Sherman said the bill calls for the “most unprecedented transfer of power to the executive branch to make decisions about both spending and taxes in history.”

“All without congressional approval, and a sharp departure from our congressional - from our constitutional - values,” he added.

The measure, which is scheduled for a committee vote next week, 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.

“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.

But critics of the measure fear that as long as the federal government has the option to bail out struggling Wall Street firms, the temptation to do so may be too much to resist for some administrations.

“If you read the bill, it exposes [taxpayers] to a lot of liability,” said a senior House Republican aide who is not authorized to speak to the media on this issue. “It’s not a death panel, these companies would not be dissolved. They would be kept on life support with taxpayer dollars.”

Some Republicans also have raised issues with language in the bill that calls for shielding the identity of struggling companies targeted by the government.

“The administration’s legislative proposal forgoes the transparency and full disclosure that are the hallmark of America’s capital markets,” said the committee’s top Republican, Rep. Spencer Bachus of Alabama. “In the place of an open process, it substitutes a regulatory regime built around a secret list of too-big-to-fail institutions.”

Mr. Geithner denied the names of the companies would be indefinitely kept from the public.

“It won’t be a secret that they’re held to tougher standards,” he said. “It’s very important that they are held to the tougher standards and you know that they’re held to tougher standards.”