GEITHNER ADDRESSES "TOO BIG TO FAIL" PROBLEM / THE FINANCIAL TIMES

Geithner addresses ‘too big to fail’ problem

By Tom Braithwaite in Washington

Published: September 23 2009 16:49

Large financial institutions will be prevented from receiving an implicit government subsidy, Tim Geithner, US Treasury secretary, and Barney Frank, chairman of the House financial services committee, insisted on Wednesday.

The Treasury’s desire to prevent large, failing financial companies such as Lehman Brothers and AIG from threatening the entire system has sparked fears that “too big to fail” companies will benefit from lower borrowing costs because they are implicitly protected by the government.
But Mr Geithner said at a hearing of the House financial services committee there would be no public list of so-called tier one financial holding companies, and that they would be constrained by close Fed supervision and tough capital requirements.

“It is very important that these institutions that matter, whose future could threaten the economy as a whole, are subject to higher constraints on leverage in the future, more conservative cushions of capital and liquidity, so that they can absorb losses they face when they make big mistakes,” said Mr Geithner.

Mr Frank said regulators would ensure a failing large interconnected company would be unwound in a way that would protect taxpayers. “There will be death panels enacted by this Congress,” he said in a joke referring to the healthcare debate, “but they will be for non-bank financial institutions that will not be considered too big to die.”

Mr Frank and Mr Geithner face opposition from Republicans, which is not fatal to their hopes for reform, but some of the concerns cross party lines.

Brad Sherman, a Democratic representative from California, tried to convince Mr Geithner that the administration should be limited to spending $1,000bn (£612bn) for use in winding down companies. He later told the Financial Times that the Treasury’s proposals for dealing with tier one FHCs gave too much power to the executive branch of government and would leave smaller companies disadvantaged.

“The executive branch wants power. Wall Street wants the executive branch to have power,” he said. “What does this mean for a medium-sized institution? It means they are up against competitors who have an implicit contingent [government] guarantee.”

Members of Congress from rural constituencies are under pressure from hundreds of small banks, concerned they face a serious regulatory threat from a proposed Consumer Financial Protection Agency.

Mr Frank has proposed compromises to try to make the CFPA acceptable to more members of his committee – including removing a requirement for lenders to offer “plain vanilla” versions of products such as credit cards and mortgages rather than just specialised products that may not suit the average consumer.

But on Wednesday he criticised the consumer protection credentials of the Fed and the Federal Deposit Insurance Corporation, arguing the existing agencies were incapable of standing up for consumers.

The Financial Times Limited 2009