GOP pushing for tougher measures to end ‘too big to fail’

Jon Ward Contributor
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Key Senate Republicans said Sunday that while the financial regulation bill is headed in right direction, it is not tough enough on large financial institutions that require government intervention in case they fail, and they indicated that all 41 Republican senators will vote against a procedural motion Monday in order to gain leverage in ongoing negotiations.

Meanwhile the White House was noncommittal on the toughest proposal that would regulate complicated financial instruments called derivatives.

Sen. Richard Shelby, Alabama Republican, said that the bill in its current form does not bar the Federal Deposit Insurance Corporation – which would have authority to take over and wind down large banks or investment firms on the edge of failure – from going to the Federal Reserve for large amounts of money to distribute to creditors.

“We need to tighten that up to make sure that it doesn’t happen. The message should be, unambiguously, that nothing’s too big to fail,” Shelby said on NBC’s “Meet the Press.” “And if you fail, we’re going to put you, put you to sleep.”

Shelby’s point goes to the heart of Republican reservations about the bill written by Senate Banking Committee Chairman Chris Dodd, Connecticut Democrat. Republicans say the bill does not do enough to end the problem of “too big to fail,” while Dodd and the White House say it does.

The GOP, especially House Republicans, worry that if the federal government is given the responsibility to wind down large banks, that process will end up becoming politicized and the FDIC will end up treating creditors differently based on political loyalties.

Many House Republicans want big firms to go through an updated bankruptcy system revised specifically to accommodate their special circumstances, which would put bankruptcy court judges in control of the process rather than the central government.

Senate Republicans like Shelby, the ranking member on the Banking Committee, and Sen. Robert Corker of Tennessee, the second-ranking member, are trying to come to an agreement on a bill that allows the FDIC this authority, but don’t want the federal government to have carte blance on who they give money to in those situations.

According to a Shelby aide, the Dodd bill as of now would allow the FDIC to pay creditors and shareholders of a failed firm more than they would get in a regular bankruptcy process, and possibly even more than 100 cents on the dollar.

“These creditors will become more reckless, not more diligent,” the aide told The Daily Caller. “As a result, the system becomes more dangerous, not more sound.”

Dodd, however, said that he has already compromised to require congressional approval for government payouts to creditors.

“We’re down to the point of insisting that Congress be involved in determining whether not it can go forward,” Dodd said on “Meet the Press.” “We’ve never done that before. So it, it’s very, very tight, in our view.”

Corker has talked before about making “resolution” so painful that no financial institution would want to enter it. And Sunday he gave some detail on how he would like to accomplish that, appearing on ABC’s “This Week.”

“If a large entity like this has to go through this resolution where in essence they’re liquidated in an orderly way, I think that everything that the executive team and the board members have earned through this company over the last five years needs to be clawed back,” Corker said.

Corker’s fairly radical proposal appeared to catch White House economic adviser Austan Goolsbee off guard. Goolsbee noted that a failed firm would have to fire its management, but did not comment either way on whether the administration favors taking back the last five years of compensation from executives of a failed firm.

“We’re open to looking at negotiating the details of how we carry out the president’s principles,” he said.

Goolsbee was also noncommittal about a proposal from Senate Agricultural Committee Chairman Blanche Lincoln, Arkansas Democrat, that would force financial institutions to separate their banking and trading operations.

Goolsbee’s answer prompted Corker to remark, “I think what Austan is saying is he doesn’t support it.” Goolsbee did not contest Corker’s assertion. Late Sunday, ABC reported that Dodd and Lincoln had reached an agreement to include her language in the Dodd bill.

Republicans remain united in opposition to the Dodd bill until they are satisfied that it won’t guarantee future bailouts or unfair advantages for large financial firms, they said.

Senate Majority Leader Harry Reid, Nevada Democrat, has scheduled a vote for Monday afternoon that would move the chamber to debate on the bill and closer to a final vote. But the GOP will likely vote against this motion, which requires 60 votes to pass.

Treasury Secretary Tim Geithner said he understood the GOP united front against the current version of the bill to be a negotiating tactic rather than whole cloth opposition to any reform.

“They’re doing what you would expect. And I think you’d do the same thing in their shoes,” Geithner said on CNN’s “Fareed Zakaria GPS.” “They’re trying to maximize the chance that they have leverage still to pull this bill in certain directions.”

“I think really on balance there are a very substantial number of Republicans who want to be for a strong set of reforms,” Geithner said. “And again, I say this on the basis of what we tell — what they tell me in private.”

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