Bair Breaks With Obama, Urges Fund to Unwind Firms

Bair Breaks With Obama, Urges Fund to Unwind Firms - 10/29/2009

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HEADLINE NEWS:

Bair Breaks With Obama, Urges Fund to Unwind Firms
Alison Vekshin

Bloomberg. October 29, 2009
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EXCERPT: Federal Deposit Insurance Corp. Chairman Sheila Bair, breaking with the Obama administration, said U.S. financial companies should prepay into a fund the government would use to unwind large failed firms. Congress should set up a Financial Company Resolution Fund and force institutions with more than $10 billion of assets to pay before a firm collapses, Bair said in testimony prepared for a House Financial Services Committee hearing today. Investors in failed companies also should take losses, she said. “A prefunded FCRF has significant advantages over an ex- post funded system,” Bair said. “It allows all large firms to pay risk-based assessments into the FCRF, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.” The Treasury Department and House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, agreed on compromise legislation this week that would recover from companies with more than $10 billion of assets any costs borne by taxpayers to disassemble a failed firm. Bair, Treasury Secretary Timothy Geithner, Federal Reserve Governor Daniel Tarullo, Comptroller of the Currency John Dugan and Office of Thrift Supervision Acting Director John Bowman also are testifying. Banking industry representatives also will speak on the draft measure. A similar bill hasn’t been proposed in the Senate. Geithner endorsed the measure and backed the plan to charge companies to shut down a failed firm after its collapse. […] The draft legislation “would generate less moral hazard because a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses,” Geithner said. Representative Luis Gutierrez, an Illinois Democrat, sided with Bair. “Most of us don’t die and then buy a life insurance policy,” Gutierrez said as the hearing began in Washington.

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