Oct 26, 5:00 PM (ET)
By ANNE FLAHERTY and JIM KUHNHENN
WASHINGTON (AP) - The Treasury Department and a senior House Democrat have decided against making financial firms pay upfront the costs of dismantling them if regulators decide they have grown "too big to fail," according to a House aide familiar with the plan.
Instead, those companies would be allowed to borrow money from the government. The government would then recoup the costs by either seizing the firm's profits or seeking restitution from the entire industry, the aide said.
The aide spoke on condition of anonymity because details had not been released. Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, was expected to announce the agreement by Tuesday.
Who should pay to dissolve big financial institutions endangering the general economy has been considered among the toughest questions that Congress had to answer after last year's near-collapse of several firms that prompted hefty government bailouts.
Lawmakers know that voters are still angry from the bailouts and don't want to see taxpayer money on the line. At the same time, businesses say it is unfair to force them to invest their capital in advance to pay for the mistakes of others.
Scott Talbott, senior lobbyist for the Financial Services Roundtable, an industry group, said paying ahead of time into a fund "would expose the entire industry to paying for an unquantifiable risk and impose upfront additional costs during a recession."
Federal Reserve Chairman Ben Bernanke said in a speech last week in Chatham, Mass., that taxpayers shouldn't be on the hook.
"It is essential that there be a credible process for imposing losses on the shareholders and creditors of the firm," Bernanke said.
Frank's legislation would give the government unprecedented power to seize non-bank firms, dismiss their management and wipe out shareholders. The government has similar powers when it comes to banks, but was powerless last year when large bank holding companies and insurance giant American International Group teetered on the brink of collapse and threatened the broader economy.
Under Frank's plan, such large firms would be designated by the government as systemically important. They would have to hold more money in reserve and would have a tougher time borrowing against their assets, in the hopes that this would make them less likely to fail.
Frank's proposal also was expected to adopt the administration's suggestion that these firms would be required to create their own plans to be dismantled if they were to fail.
Treasury Secretary Timothy Geithner suggested in June that the administration wouldn't try to force bank holding companies and other large financial institutions to prepay into a kind of resolution fund. Instead, he said, the government would try to recoup lost money by assessing a fee over time to these firms.
"That will help make sure that the burden for that is borne by bank holding companies, not by the 8,000 other financial institutions in the United States - smaller community banks - that were not responsible for that error," he said in testimony in June.
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