Citadel's Griffin assails too-big-to-fail reforms
* New law promotes "crony capitalism" Griffin says
* Well-connected firms benefit the most, he says
* Markets may suffer under new law, Allstate's Wilson says
BEVERLY HILLS, Calif. May 2 (Reuters) - Banks with close ties to Washington would be favored under new liquidation rules meant to avoid "the too big to fail" taxpayer rescues seen in the recent financial crisis, Kenneth Griffin, head of giant hedge fund Citadel LLC, warned on Monday.
"Companies connected to Washington that curry political favor will be favored" by the new rules "at the expense of those that do not have their business model built around appeasing politicians," Griffin told the 2011 Milken Institute Global Conference in Beverly Hills, California.
"It will deeply entrench crony capitalism in the middle of our financial system," he said of the liquidation authority included in last year's Dodd-Frank financial law.
Lehman Brothers filed for bankruptcy in 2008, sending panic through the financial system and leading the U.S. government to provide massive aid packages to other financial firms.
In an effort to prevent future disorderly failures or massive bailouts, Dodd-Frank empowers the U.S. Treasury to direct the Federal Deposit Insurance Corp to begin liquidating a failing financial firm.
Griffin said the law gives regulators too much authority and discriminates against banks that do not have enough clout in Washington.
"It opens the door to crony capitalism unlike what we've ever seen before in this country," he told a panel discussion at the conference.
Jim Millstein, the former chief restructuring officer of the U.S. Treasury Department, agreed with Griffin that the legislation was flawed but said there is a need for government to provide liquidity to the financial system in times of strain.
"My own estimation is that if we hit close to the edge again, we will see a repeat of the drama played out in September, October 2008," Millstein said.
Thomas Wilson, chief executive of insurer Allstate Corp (ALL.N) and deputy chairman of the Federal Reserve Bank of Chicago, said the law gives the FDIC too much power.
"When you ask the FDIC to come do an O.L.A. (orderly liquidation authority) with rules that they make up, it will work to the disadvantage of the markets," Wilson told panelists. (Reporting by Philipp Gollner; Editing by Tim Dobbyn)
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