Sen. Dodd says "too big to fail" must end

WASHINGTON (Reuters) - A key to financial regulation reform will be finding new ways to deal with large, troubled firms without giving them implicit, “too big to fail” government protections, Senate Banking Committee Chairman Christopher Dodd told Reuters Television on Thursday.

“I’m very much in support of establishing a resolution mechanism,” said Dodd, a Democrat, in an interview.

That might include a receivership or trusteeship system, he said, an approach favored by many reform advocates hoping to prevent more of the kind of frantic, case-by-case corporate bailouts seen in the final months of the Bush administration.

Preventing such a resolution mechanism from shielding big firms from the risk of failure will be crucial, he said.

“I really would like to have the emphasis be that if you mess up, you’re done. We’re not going to provide that kind of perpetual guarantee that allows you to continue in existence. That ‘too-big-to-fail’ notion has to end,” he said.

The Obama administration and congressional Democrats are trying to tighten bank and capital market regulations after the worst financial crisis in generations. Similar efforts are under way in the European Union.

The House of Representatives is debating several pieces of legislation and is expected to vote on a consolidated bill next month. The Senate has been slower to act.

Besides a resolution mechanism, lawmakers also want to write new rules for the securitized debt markets, which froze up last year during the crisis and have not fully recovered.

President Barack Obama and House Democrats favor requiring banks and other securitizers of loans, such as mortgages, to retain on their books at least 5 percent of the risk of debt converted into securities and sold to investors.

That way lenders would have more of an interest in ensuring that borrowers they lend money to can pay it back, according to backers of the so-called 5-percent “skin in the game” rule.

“Skin in the game is not a bad idea. We all know what happened in the residential mortgage market ... There was no one holding any skin in the game,” Dodd said.

“Whether or not it’s 5 percent -- I’m not committed to a number at this point -- but I do believe that people ought to have skin in the game, so to speak,” he said.