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Taking down failures: Who pays, when and how much?
By
AP
Nov 2, 2009
WASHINGTON (AP) — House Democrats are balking at an Obama administration plan that would put taxpayers on the hook for up to five years to dismantle any giant financial firm whose failure could repeat last year's Wall Street collapse.
The administration, through Treasury Secretary Tim Geithner, and House Financial Services Committee Chairman Barney Frank agreed last week to assess the costs of a government takeover on a failing company's competitors. The companies would have 60 months after the fact to pay.
Angry that such a plan would make taxpayers the first line of defense when a company implodes, Democrats now plan to propose making large firms prepay premiums into a special fund that would be tapped when calamity strikes, Frank's spokesman said Monday.
Call it insurance vs. pay-as-you-fail.
The debate is hardly a simple accounting exercise. It goes to the heart of how government holds the industry accountable, how policy affects financial recklessness, and, perhaps most important, how far the executive branch should go in making taxpayers foot the bill for private sector failure, even if for a limited time.
The administration's plan, contained in draft legislation introduced last week, would recoup government costs of unwinding a failed institution from companies with assets of $10 billion or more. The payments, however, would not have to occur for five years, meaning that taxpayers would have to front the expense.
And those expenses could be huge. The federal government, for instance, has carved out $70 billion in taxpayer money so far to cover costs of unraveling the insurance conglomerate American International Group.
At a hearing last week, several Democrats made their displeasure known. "No more bailouts," declared Rep. Luis Gutierrez, D-Ill. "Let them create the fund, the systemic risk fund, that will guarantee that the American taxpayer will no longer have to be involved should they cause such a crisis ever again."
Lawmakers weren't the only ones pushing for an upfront payment. The head of the Federal Deposit Insurance Corp., Sheila Bair, also argued against an after-the-fact assessment.
By Monday, Frank indicated he would support an amendment requiring firms to prepay.
"Hopefully it will put together some kind of fund that will give us the kind of capital, so that there is not a temptation in the future to put taxpayers on the hook," Frank spokesman Steve Adamske said.
Requiring prepayment opens a whole new set of questions. How big should the fund be? Who should pay and in what amounts? Adamske said those issues remain unresolved.
Large financial institutions oppose an upfront payment. They say new proposed regulations would already place a financial burden on them by requiring that they avoid over-leveraging by keeping more capital on hand. Industry officials also say that paying after the fact would give companies an incentive to self police.
Geithner testified last week that creating an insurance fund with prepayments would also increase the danger that companies would act recklessly, because they would know that a fund was there to assist them.
"We don't want to create that expectation," he told the Financial Services committee on Thursday.
On Monday, the White House took a more accommodating tack.
"The most important thing is to make sure that we are building a new framework that creates no presumption that firms will be bailed out and that protects taxpayers from having to foot the bill for failures," White House spokeswoman Jen Psaki said.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm that advises financial institutions, said in an interview that upfront payment is a better policy. Seeking to recoup the cost after a company fails, she said, "penalizes those left standing, so there's no harm no foul to the failure."
Moreover, Petrou said, passing the cost of liquidation to other firms at a time of market stress would be counterproductive.
"That's why one of the proposals was to phase it in over time," she said. "But the more gentle you make the post-failure assessment, the more taxpayers are at risk."
© 2009 CLEARMEDIA
