Finance and Economic

The Obama administration’s new proposal for tackling financial risk in the U.S. economy, unveiled just two days ago, came under attack on Thursday from Congress and regulators, with questions raised about its funding and scope.

U.S. Treasury Secretary Timothy Geithner scrambled in a congressional hearing to defend the plan against critics who said it would give too much power to regulators and enshrine government bailouts for troubled financial firms in law.

Released by the Treasury Department and Democratic Representative Barney Frank on Tuesday, the plan is an bold attempt to make sure the Bush administration’s confused handling of last year’s financial crisis doesn’t happen again.

That episode saw some firms, such as AIG and Citigroup, get multibillion-dollar bailouts. Others, such as Lehman Brothers, were allowed to go into bankruptcy, while still others were forced into government-engineered mergers.

The 253-page Obama plan tries to strike a balance between bailouts and bankruptcy, while insisting that large financial firms, not taxpayers, foot the bill for future interventions.

“Without the ability for the government to step in and manage the failure of a large firm and contain the risk of the fire spreading, we will be consigned to repeat the experience of last fall. It’s a really stark, simple thing,” Geithner said at a hearing of the House of Representatives Financial Services Committee, chaired by Frank and packed with bank lobbyists.

Amid concerns that a few elite financial giants have become “too big to fail,” the administration’s plan would empower regulators to police, restructure, and even shut down large firms that threaten stability payday advance. It resembles the Federal Deposit Insurance Corp’s power to seize and dismantle troubled banks.

Bankruptcy would be remain the dominant tool for handling non-bank financial firm failures, Geithner said.

“But as the collapse of Lehman Brothers showed, the bankruptcy code is not an effective tool for resolving the failure of a global financial services firm in times of severe economic stress,” he said.

The plan is meant to mesh with many other financial regulatory reform proposals being pursued by the administration and congressional Democrats.

HALTING PROGRESS

Ranging from regulation of over-the-counter derivatives and setting up a financial consumer watchdog agency, to curbing bankers’ pay and cracking down on credit rating agencies and hedge funds, the reform push has been making halting progress.

Final action is still months away. Frank’s committee has approved some proposals, but votes by the full House await and the Senate has barely begun handling the matter.

“Congress will be split” over the new systemic risk plan, said financial services policy analyst Brian Gardner at investment firm Keefe Bruyette & Woods.

“Opposition cuts across party lines. We also expect significant opposition to increasing the Fed’s role as a banking regulator in the Senate and we think this bill’s prospects are far from certain,” Gardner said. 

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