Panel to debate new government powers over troubled firms

A key House committee next week is slated to consider a controversial measure backed by the Obama administration that would grant the federal government new powers to wind down failing financial firms.

The proposal, known as “resolution authority,” is a high priority for the Treasury Department, which has been pushing lawmakers to quickly pass the measure.

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Granting the authority would allow the federal government to take control of the ailing firms and sell off their assets.

The administration argues that the new power will prevent future bailouts, such as the $700 billion rescue program, which has been run by both the Bush and Obama administrations.

The House Financial Services Committee is slated to hold a hearing on Thursday on resolution authority and other measures on “systemic risk.” The committee has already approved two financial overhaul bills that create a Consumer Financial Protection Agency (CFPA) and restrict the multi-trillion-dollar market for complex financial derivatives.

The resolution authority issue is highly controversial, however. Financial Services Chairman Barney Frank (D-Mass.) said Thursday that he believes it will be tougher to move through his panel than the CFPA bill, which was approved after a five-day markup.

Republican and some Democratic critics have lashed out at the resolution authority proposal, saying it would perpetuate government bailouts and lead investors to take additional risks.

The Treasury Department remains in close contact with lawmakers on Capitol Hill and is urging them forward on resolution authority. The financial industry is closely watching for possible changes to the resolution authority bill before it is marked up.

The House committee, starting Tuesday, will also mark up four bills on investor protection, credit rating agencies, insurance and investment registration. Rep. Paul Kanjorski (D-Pa.) is shepherding the bills through the panel and expects them to be less controversial than other areas of financial reform.

Lawmakers aim to impose new curbs on the credit rating industry, but the legislation does not completely overhaul the sector. Critics argue there is an inherent conflict of interest in the industry: Firms that seek top ratings for securities they issue pay the ratings firms directly.

“The rating agencies really screwed up,” Kanjorski told reporters on Friday. “People are asking for us to put their heads in the guillotine.”

But the bill does not outlaw the issuer-pay model.

“I’d hoped we could have removed that conflict of interest in its entirety,” Kanjorski said. “It’s my conclusion that they probably could not fund themselves if they were user-paid as opposed to issuer-paid, and therefore we wouldn’t be strengthening the system, only creating a larger void.”

Kanjorski also dropped an earlier plan to impose a “collective liability” that would make all agencies liable for failures in the industry.

The insurance industry bill also stops far short of the highly controversial question of setting up a new federal charter for insurance firms. However, Kanjorski said that he was looking to start that discussion next year and mentioned that some forms of insurance, including bond insurance and reinsurance, should fall under a federal system.

The insurance industry has been strongly divided for years on the question of a federal charter.

While the CFPA bill was reported out of the committee, powerful industry lobbying groups continue to press hard for further changes in the House and Senate. Credit union groups, including the National Association of Federal Credit Unions (NAFCU), and community banks waged a successful campaign to limit the agency’s examination power.

"We appreciate the committee's focus on going after the bad actors that caused this crisis, but NAFCU will continue to seek an exemption for credit unions,” said Dan Berger, executive vice president of the association.