MNeagle
16th April 2010, 10:37 AM
April 16 (Bloomberg) -- U.S. Treasury Department officials are seeking to change provisions in the Senate’s proposed financial-rules overhaul that they say might hamper regulators’ ability to seize a large bank and prevent a financial panic.
Treasury officials say part of the Senate proposal would restrict the amount of money regulators could use to operate a failing firm after it has been seized. They also say a provision requiring bankruptcy judges to sign off on the seizure of a systemically important firm could prevent fast action.
The Obama administration wants to give regulators authority to head off the kind of credit freeze that followed the collapse of Lehman Brothers Holdings Inc. in September 2008. Provisions of the Senate bill backed by Banking Committee Chairman Christopher Dodd might impede efforts to dismantle failing firms that pose a threat to the system, Treasury officials say.
Speed is vital because “the moment you say we’re going to let someone look at this, everyone starts scurrying around lining up their ducks, and you basically have invited a run on a bank,†said Bill Brown, a Duke University law professor and former managing director at Morgan Stanley.
Treasury officials say they want to change some provisions of the Senate plan without scuttling the financial-regulation overhaul, which has been a top priority of President Barack Obama since he took office in January 2009.
“There’s openness to making sure that the whole process works,†Michael Barr, Treasury’s assistant secretary for financial institutions, said in an interview yesterday.
Council of Regulators
The Senate Banking Committee approved a financial-rules overhaul on March 22 that advances the Obama administration’s call for the biggest restructuring of Wall Street oversight since the 1930s. The bill proposed by Dodd would create a council of regulators to monitor systemic risks, set up an independent consumer-protection agency at the Federal Reserve and shift oversight of mid-size and small banks from the Fed to other agencies.
“We’re very close to something that we could stand up and say with pride is going to be a good and strong bill, prevent us from ever seeing this kind of crisis again in the future,†Treasury Secretary Timothy F. Geithner said at a news conference on April 14.
The Senate proposal gives the Federal Deposit Insurance Corp. authority to borrow from the Treasury as much as 90 percent of the “fair value†of a firm’s assets to cover operational costs while it is in receivership.
Too Restrictive
Treasury officials say such a limit could lead investors to wonder whether a firm could meet its obligations, and they worry that “fair value†is too restrictive and could be distorted in a panic.
Dodd and the FDIC say the 90 percent cap limits risks to taxpayer funds because the bank’s assets could be tapped to make up any government losses.
“It’ll be money we can get back,†said Kirstin Brost, a spokeswoman for Dodd, a Connecticut Democrat.
This effort to limit taxpayer liability could prevent regulators from halting a crisis, said Stephen Myrow, a former Treasury official who is now managing director at ACG Analytics Inc., a Washington-based investment research firm.
“In trying to thread the political needle and maintain flexibility for the future, Congress is running the risk of spooking the market today,†Myrow said.
Legislators at the same time are considering requiring big banks to pay into a resolution fund for winding down systemically important firms. Both the Senate proposal and a House bill call for making banks pay ahead of time into such a fund, although they differ on its size.
Bankruptcy Judges
Treasury officials also oppose giving bankruptcy judges too big a role in the decision to take down a failing firm, and they want to shorten the time allowed for judicial review. The FDIC agrees, according to two officials with knowledge of the negotiations.
The Senate bill would require regulators to get a bankruptcy panel’s approval to seize a failing firm. Treasury officials want to limit the approval process, possibly to 24 hours.
Senate Minority Leader Mitch McConnell said this week that big financial firms ought to turn to bankruptcy, not government assistance, when they run into trouble. Geithner has said banks are different from other companies and need extra help with ensuring emergency liquidity.
“The normal bankruptcy regime cannot work for banks, because banks need funding to operate, even as they are being wound down,†Geithner said in a March 22 speech at the American Enterprise Institute. “In a crisis, there is no plausible private source of temporary financing, like debtor-in-possession financing for companies in bankruptcy.â€
Compromise Effort
Bankruptcy judges were given a role in the Senate bill when Dodd was working with Senator Bob Corker, a Tennessee Republican, on a bipartisan measure. That effort fell apart, and the banking committee ultimately passed a bill supported only by Democrats. A congressional aide said Dodd is not wedded to the bill’s current bankruptcy language and instead plans to work on the issue with the Senate Judiciary Committee.
The House bill doesn’t include a role for bankruptcy judges in deciding whether regulators should seize a failing financial firm. Regulators also don’t consult bankruptcy judges during the FDIC’s existing bank-failure process.
http://www.bloomberg.com/apps/news?pid=20601087&sid=apEZoELQcE1c&pos=7
Treasury officials say part of the Senate proposal would restrict the amount of money regulators could use to operate a failing firm after it has been seized. They also say a provision requiring bankruptcy judges to sign off on the seizure of a systemically important firm could prevent fast action.
The Obama administration wants to give regulators authority to head off the kind of credit freeze that followed the collapse of Lehman Brothers Holdings Inc. in September 2008. Provisions of the Senate bill backed by Banking Committee Chairman Christopher Dodd might impede efforts to dismantle failing firms that pose a threat to the system, Treasury officials say.
Speed is vital because “the moment you say we’re going to let someone look at this, everyone starts scurrying around lining up their ducks, and you basically have invited a run on a bank,†said Bill Brown, a Duke University law professor and former managing director at Morgan Stanley.
Treasury officials say they want to change some provisions of the Senate plan without scuttling the financial-regulation overhaul, which has been a top priority of President Barack Obama since he took office in January 2009.
“There’s openness to making sure that the whole process works,†Michael Barr, Treasury’s assistant secretary for financial institutions, said in an interview yesterday.
Council of Regulators
The Senate Banking Committee approved a financial-rules overhaul on March 22 that advances the Obama administration’s call for the biggest restructuring of Wall Street oversight since the 1930s. The bill proposed by Dodd would create a council of regulators to monitor systemic risks, set up an independent consumer-protection agency at the Federal Reserve and shift oversight of mid-size and small banks from the Fed to other agencies.
“We’re very close to something that we could stand up and say with pride is going to be a good and strong bill, prevent us from ever seeing this kind of crisis again in the future,†Treasury Secretary Timothy F. Geithner said at a news conference on April 14.
The Senate proposal gives the Federal Deposit Insurance Corp. authority to borrow from the Treasury as much as 90 percent of the “fair value†of a firm’s assets to cover operational costs while it is in receivership.
Too Restrictive
Treasury officials say such a limit could lead investors to wonder whether a firm could meet its obligations, and they worry that “fair value†is too restrictive and could be distorted in a panic.
Dodd and the FDIC say the 90 percent cap limits risks to taxpayer funds because the bank’s assets could be tapped to make up any government losses.
“It’ll be money we can get back,†said Kirstin Brost, a spokeswoman for Dodd, a Connecticut Democrat.
This effort to limit taxpayer liability could prevent regulators from halting a crisis, said Stephen Myrow, a former Treasury official who is now managing director at ACG Analytics Inc., a Washington-based investment research firm.
“In trying to thread the political needle and maintain flexibility for the future, Congress is running the risk of spooking the market today,†Myrow said.
Legislators at the same time are considering requiring big banks to pay into a resolution fund for winding down systemically important firms. Both the Senate proposal and a House bill call for making banks pay ahead of time into such a fund, although they differ on its size.
Bankruptcy Judges
Treasury officials also oppose giving bankruptcy judges too big a role in the decision to take down a failing firm, and they want to shorten the time allowed for judicial review. The FDIC agrees, according to two officials with knowledge of the negotiations.
The Senate bill would require regulators to get a bankruptcy panel’s approval to seize a failing firm. Treasury officials want to limit the approval process, possibly to 24 hours.
Senate Minority Leader Mitch McConnell said this week that big financial firms ought to turn to bankruptcy, not government assistance, when they run into trouble. Geithner has said banks are different from other companies and need extra help with ensuring emergency liquidity.
“The normal bankruptcy regime cannot work for banks, because banks need funding to operate, even as they are being wound down,†Geithner said in a March 22 speech at the American Enterprise Institute. “In a crisis, there is no plausible private source of temporary financing, like debtor-in-possession financing for companies in bankruptcy.â€
Compromise Effort
Bankruptcy judges were given a role in the Senate bill when Dodd was working with Senator Bob Corker, a Tennessee Republican, on a bipartisan measure. That effort fell apart, and the banking committee ultimately passed a bill supported only by Democrats. A congressional aide said Dodd is not wedded to the bill’s current bankruptcy language and instead plans to work on the issue with the Senate Judiciary Committee.
The House bill doesn’t include a role for bankruptcy judges in deciding whether regulators should seize a failing financial firm. Regulators also don’t consult bankruptcy judges during the FDIC’s existing bank-failure process.
http://www.bloomberg.com/apps/news?pid=20601087&sid=apEZoELQcE1c&pos=7