How to Handle Firms ‘Too Big To Fail’ Divides Democrats, Republicans

April 14, 2010

U.S President Barack Obama will try to turn up the pressure for an overhaul of Wall Street regulations as he meets Wednesday with top Democratic and Republican lawmakers to discuss a sweeping package of reforms.

Republicans are seizing on a provision that would allow regulators to step in to dismantle large, troubled firms. They argue that would set the stage for “endless” bailouts of Wall Street, a claim the White House says is false.

The White House meeting, at 10:45 a.m. will include Senate Republican leader Mitch McConnell and House Republican leader John Boehner. Obama’s Democrats will be represented by Senate Majority Leader Harry Reid, House of Representatives Speaker Nancy Pelosi and House Democratic leader Steny Hoyer.

After a major victory on healthcare reform, Obama is shifting to financial reform as his top legislative priority.

Obama administration officials have argued that passing a financial reform bill is crucial to preventing a repeat of the 2008-2009 turmoil that led to the worst U.S. recession since the 1930s Great Depression.

“I do not think there is a tenable position that anyone could take … that says we don’t need to fix the system, to reform the system,” U.S. Treasury Secretary Timothy Geithner said in a panel discussion Tuesday. “Look at the devastation caused by the financial crisis. Look at the damage it did to the lives of millions of Americans.”

But a big fight looms as Senate Democrats seek to pass a final bill by the end of this month. The House passed a version of the measure in December.

Obama needs at least some Republican help to pass it in the Senate and is targeting moderate Republicans such as Senators Judd Gregg and Bob Corker, who have signaled some willingness to work on a bipartisan bill.

“We think this is a choice that each individual Republican is going to have to make,” White House deputy communications director Jen Psaki said. “We wanted to bring all parties to the table to have a conversation about how to move forward toward a strong bill.”

‘TOO BIG TO FAIL’

Senator Charles Schumer said there is broad popular support even on Wall Street for financial regulation that is strong but not punitive. “There’s a way to do this,” the New York Democrat told MSNBC. “We need regulation and it should be smart, strong, forward-looking but not vindictive.”

At stake are the shape and profitability of the financial services industry for years to come, as well as the U.S. economy’s ability to withstand future financial crises.

In addition to creating a “resolution authority” to wind down failing financial firms, the bill would toughen oversight of banks and capital markets and beef up consumer protections.

But what to do about “too big to fail” financial firms is a central question. The Obama administration says the resolution authority would prevent a repeat of the catastrophe that followed the September 2008 collapse of investment bank Lehman Brothers and the near-failure of insurer AIG.

McConnell took aim at the resolution authority provision. “It provides for an endless taxpayer bailout of Wall Street banks,” McConnell said, adding that was “the one thing the American people have said they don’t want to happen again.”

In a blog posting on the White House website, Psaki labeled such criticism “false” and accused Republicans of trying to link the bill to the unpopular $700 billion Wall Street rescue passed under Republican President George W. Bush.

“The Senate bill explicitly mandates that a large financial firm that faces failure will be allowed to fail, and it explicitly prohibits the use of any funds to ‘bail out’ a failing firm,” Psaki said. “Large financial firms, not taxpayers, will be required to bear the costs.”

Elizabeth Warren, who chairs a panel overseeing the Wall Street bailout, had a stronger response to McConnell’s criticism. “The notion that it perpetuates bailouts? That’s just nuts,” she told MSNBC.

(Additional reporting by David Morgan; Writing by Caren Bohan; Editing by Peter Cooney and Doina Chiacu)

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