Obama calls House wind-down legislation essential

President Barack Obama said legislation unveiled by a key House panel on Tuesday to grant the government new powers to deal with failing financial firms is "absolutely essential" so that the taxpayers don't need to foot future bailouts.

In a letter to Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, Obama said the government must have the ability to dissolve financial firms so that the losses are absorbed by equity holders and creditors, not taxpayers.

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"No financial system can work effectively if financial institutions and investors operate with the belief that the government will act to protect them from the consequences of their failures," Obama wrote. "This belief creates a perverse incentive for large firms to take reckless risks."

The Obama administration and Frank worked closely on the legislation, one of the more controversial elements of a broad push to overhaul the financial regulatory system. The administration has pressed for the new powers to overcome the problem of "too big to fail" that plagued lawmakers last year when the credit crisis erupted. The government did not have all the tools it needed, the Obama administration has argued, when Lehman Brothers collapsed.

"Emergency authority to contain financial panics is absolutely necessary but should be targeted at providing liquidity and preventing the spread of failure from insolvent firms to otherwise viable institutions," Obama wrote.