Treasury Secretary Timothy F. Geithner says that bankruptcy — not taxpayer-funded bailouts — will be the federal government’s primary response to failing Wall Street firms in the future.
“In all but the rarest of cases, bankruptcy will remain the dominant tool for handling the failure of nonbank financial firms,” Mr. Geithner told the House Financial Services Committee on Thursday.
The secretary was testifying before the panel to push for legislation introduced by the committee this week that would give the federal government the power to “wind down” failing nonbank Wall Street firms so large that their demise could collapse the economy.
The proposal, worked out between the Obama administration and the committee’s chairman, Rep. Barney Frank, Massachusetts Democrat, would give the Federal Reserve the power to step in and dismantle failing firms deemed “too big to fail” before they collapse.
“It represents a comprehensive, coordinated answer to the moral hazard problem posed by our largest, most interconnected financial institutions,” Mr. Geithner said.
The secretary said the legislation is needed because, as the collapse of Lehman Brothers showed, the current bankruptcy code “is not an effective tool for resolving the failure of a complicated financial services firm in times of severe economic stress.”
Mr. Geithner promised that the increased powers that would be given to the federal government and its financial regulators wouldn’t create a system where taxpayer bailouts of Wall Street are the norm.
“We cannot put taxpayers in the position of paying for the losses of large, private financial institutions,” he said.
Committee Democrats mostly approve of the measure. Republicans say they aren’t convinced it provides enough safeguards against future Wall Street bailouts.
The panel’s top Republican, Rep. Spencer Bachus of Alabama, also complained that the committee, which received the bill Tuesday afternoon, did not have enough time to review it and offer changes before a planned markup on Wednesday.
“The administration’s desire to get something — anything — done to satisfy some arbitrary deadline imposed on the chairman will result in this committee passing a product that has not received the careful deliberation necessary to ensure sound legislation,” Mr. Bachus said.
“It’s worth taking the time to get it right.”