'Too big to fail' bill hits speed bump in Congress

WASHINGTON, Nov 3 (Reuters) - Congressional Democrats need more time to debate the funding for an Obama administration “resolution authority” bill for dealing with troubled financial firms, likely pushing committee consideration of the measure into next week, said lobbyists and a House aide on Tuesday.

The bill was scheduled to be considered and possibly voted on this week. But lobbyists said Democrats on the U.S. House of Representatives Financial Services Committee disagree over how to fund the program and need to extend debate on it.

As presented last week, the bill called for large financial firms to repay the U.S. Treasury Department on a case-by-case basis for Treasury loans used to finance government regulators’ interventions to fix troubled financial firms.

But committee Chairman Barney Frank on Friday decided he would no longer support that funding approach for the proposal, which is meant to deal with the question of financial mega-firms that markets have come to see as “too big to fail.”

Instead, a spokesman for the chairman said last week that Frank would back having large firms make regular payments into a pre-established fund for unwinding troubled competitors.

Frank has scheduled a press conference for Tuesday afternoon at which he is expected to discuss the issue.

His shift last week aligned him with Federal Deposit Insurance Corp Chairman Sheila Bair, who argued in favor of firms prepaying into an established resolution fund, rather than paying case-by-case after the fact.

Treasury Secretary Timothy Geithner said last week that after-the-fact funding would avoid the “moral hazard” of firms assuming that there is a pre-funded government “insurance” pool available to protect them from failure.

Financial companies with more than $10 billion in assets would be assessed under the “resolution authority” program proposed by Frank and the Obama administration.

The “resolution authority” proposal is part of a larger financial regulatory overhaul moving through Congress after the worst financial crisis in generations.

In the Bush administration's confused handling of the crisis, some firms were allowed to collapse, such as Lehman Brothers, some got huge taxpayer bailouts, such as Citigroup C.N and American International Group AIG.N, and some were acquired in government-engineered deals.

President Barack Obama and congressional Democrats want to avoid another such episode by setting up a more orderly protocol for dealing with large non-bank financial firms that get into trouble. The resolution process they have proposed resembles the FDIC’s process for handling troubled banks.

Editing by Chizu Nomiyama