Bachus wants liquidation power repealed

WASHINGTON Thu Sep 23, 2010 3:10pm EDT

1 of 2. House Financial Services Committee ranking member Spencer Bachus (R-AL) speaks during the Reuters Washington Summit September 23, 2010.

Credit: Reuters/Gary Cameron

WASHINGTON (Reuters) - Republicans would try to repeal the government's new authority to seize and liquidate large troubled financial firms should they take control of the U.S. House of Representatives next year, a key lawmaker said on Thursday.

Representative Spencer Bachus, who is in line to be chairman of the House Financial Services Committee under Republican control, said that section of the new Dodd-Frank financial law institutionalizes government bailouts of "too-big-to fail" institutions and puts taxpayers at risk.

"'We're going to end bailouts,' that's what the president says," he told the Reuters Washington Summit. "This legislation establishes them in statute."

Democrats have dismissed this criticism, arguing that the point of the new resolution authority is to prevent government bailouts as well as the chaos of 2008 when regulators had to decide on the fly what to do with Lehman Brothers and insurer American International Group (AIG.N).

Investment bank Lehman was allowed to fail in September 2008, rocking financial markets, while insurer AIG received a massive pledge of government aid just a day after Lehman filed for bankruptcy.

Democrats contend that under the new system, large financial institutions would be allowed to fail, but the failure would be managed in an orderly matter.

In place of the liquidation authority, Bachus said Republicans would modify bankruptcy law and allow that process to handle a big failure.

Under the law enacted in July, the government would designate certain financial companies as systemically important, meaning their collapse could threaten the financial system. The Federal Deposit Insurance Corp is given the power to seize and break them up if they are heading toward collapse.

Bachus argued that this new regime continues the uncertainty over whether the government will step in as a large institution nears collapse and that such a decision is inherently "political."

"This doesn't say they have to do it," he said. "They might do it for Bank of America (BAC.N) but then again they might not for Citi (C.N)."

He also objected to the FDIC's ability to borrow from the Treasury to fund a liquidation, saying it amounted to the government buying a failing company's assets with taxpayer funds.

"If you're going to resolve a corporation, why would you come in and buy their assets?" he said.

Supporters of the bill counter that taxpayer funds are not at risk because the law allows the FDIC to later recover whatever it borrowed by charging large institutions a fee.

Bachus also said the law gives large institutions an unfair advantage over their smaller competitors because investors believe that through the liquidation process the government will not let them lose their money, even if the overall institution fails.

"That's a double standard," he said.

(Editing by Tim Dobbyn and Leslie Adler)