Rep. Frank on How to Wind Down Failing Financial Giants without Threat to the Economy or Cost to Taxpayers

October 29, 2009 -- WASHINGTON – Congressman Barney Frank today called a hearing of the House Financial Services Committee to discuss legislation to deal with large financial institutions which may causes systemic risks to the American economy. Frank seeks to establish federal “resolution authority” which would make it possible to wind down very large, failing firms without using taxpayer funds.

A similar mechanism, operated by the Federal Deposit Insurance Corporation (FDIC), has successfully operated for decades, protected both depositors and the economy as a whole. The task of creating a system for institutions which fall outside the jurisdiction of the FDIC will be a major, difficult hurdle for proponents of financial reform.

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In his testimony, Treasury Secretary Timothy Geithner praised committee members for their work to date. “In the face of substantial opposition you have acted quickly to enact far-reaching reforms that will better protect consumers and investors from unfair or fraudulent investment lending practices.”

“One of the most searing lessons of last fall is that no financial system can work if institutions and investors assume that the government will protect them against the consequences of failure,” Geithner said. Never again should taxpayers be put in the position of having to pay for the losses of private institutions. We have to create a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy.”

Congressman Frank stressed that the legislation to establish resolution authority would be part of a larger package of regulatory reform which will prevent some of the abuses which led to the economic crisis last fall.

“We are going to reform securitization with some risk retention,” Frank said, referring to the practice of bundling and reselling mortgages as securities, one of the key mechanisms of the financial collapse last year. And “we are restricting irresponsible subprime loans, we are regulating derivatives, there will be no unreported, no unregistered large enterprises going forward; we will have the ability to significantly increase capital requirements more than proportionally.” Last week, the House Financial Services Committee passed legislation to regulate derivatives, a tool for hedging financial risk which, ironically, can greatly magnify risk in some situations.

And “if all that fails,” Frank said, “we hammer them pretty hard and we protect the taxpayers."

The afternoon hearing featured testimony by Sheila Bair, Chairman of Federal Deposit Insurance Corporation, John Dugan, Comptroller of the Currency, Daniel Tarullo, Governor of the Board of Governors of the Federal Reserve System , and John Bowman, Acting Director of the Office of Thrift Supervision.

Source: Congressman Barney Frank