Washington Reworks Financial Regulations
Monday, October 26, 2009SUSIE GHARIB: Too big to fail, those four words stirred up lots of anxiety for American taxpayers during the financial crisis. Now the Obama administration and lawmakers are working on new rules to deal with large financial firms that run into trouble and threaten the overall economy. What firms are too big to fail and in a crisis which ones will be rescued and how? As Stephanie Dhue reports, those are just some of the questions under discussion as the government reforms financial regulations.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: It wasn't too long ago that the average American didn't even think about financial firms that were too big to fail. But with billions spent on bailouts things have changed. That has House Financial Services Chairman Barney Frank and Treasury officials crafting new regulations to put an end to AIG-style rescues. Under the proposal, the Federal government would have the authority to seize troubled financial firms, throw out their management, change terms of existing loans and wipe out shareholder stakes. Scott Talbott lobbies for large financial institutions. He says the proposal may go too far.
SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: Our concern is that they over regulate and stifle the ability of the firms to raise capital. If there's so much government intervention or the threat of government intervention, then the investors will demand a higher rate of return or demand a higher rate in order to invest in the company, thus weakening the companies' ability to raise capital.
DHUE: Too bad says banking expert Karen Shaw Petrou.
KAREN SHAW PETROU, MANAGING PARTNER, FEDERAL FINANCIAL ANALYTICS: If they are able to raise capital because the market expects them to be bailed out, then it's time to change that.
DHUE: Frank's proposal also makes it harder for financial firms to borrow heavily against their assets. Petrou says what's needed are tougher regulations and a new authority to resolve failed banks.
PETROU: If all you do is come up with a soft landing for very large financial institutions, then they'll just get bigger.
DHUE: But others say bankruptcy courts, rather the government are better suited to wind down big financial firms. AEI scholar and former Federal Home Loan Bank President Alex Pollock says so-called orderly resolutions can be costly to taxpayers.
ALEX POLLOCK, RESIDENT FELLOW, AEI: Somehow or other, as you expand this notion of having regulatory resolutions, you're also expanding typically the amount of money that the government is willing to put up.
DHUE: Lawmakers are considering setting up a resolution fund so regulators can unwind failed financial firms, but the big question is just how to pay for it. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
