- The Washington Times - Thursday, July 3, 2008

LONDON | U.S. Treasury Secretary Henry M. Paulson Jr. called for regulatory changes that would allow financial firms to fail without threatening broader market stability.

The Treasury chief also proposed steps providing for the president to approve of any use of taxpayer funds to aid a financial company. In a speech in London on Wednesday, Mr. Paulson identified a legal gap that leaves unspecified how to deal with failures of companies that don’t take deposits, such as investment banks.

Mr. Paulson’s proposals aim to tighten supervisors’ oversight of lenders and dealers while at the same time discourage companies from depending on a government rescue if their bets go wrong. His speech comes a week before a congressional hearing to debate a regulatory overhaul in the wake of the credit crisis that caused the near-bankruptcy of Bear Stearns Cos.

“We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,” Mr. Paulson said in the speech at Chatham House, an international affairs research organization.

The Treasury chief noted that while there is a resolution mechanism for commercial banks, there is no such process for securities firms. Federal Deposit Insurance Corp. Chairman Sheila Bair has also urged that an agency be given power to take over and liquidate investment banks in an orderly manner. The FDIC has that power over lenders whose deposits it insures.

“We will need to give our regulators additional emergency authority to limit temporary disruptions,” Mr. Paulson said. “Any commitment of government support should be an extraordinary event that requires the engagement of the executive branch.”

Mr. Paulson participated in the discussions that led to the Fed’s assistance to Bear Stearns. His remarks indicated he favors a formal process for the administration’s consent to use taxpayer funds.

The Fed invoked emergency powers as lender of last resort to give Bear Stearns a temporary loan in March and then to agree to take on $30 billion of the company’s assets to secure its takeover by JPMorgan Chase & Co.

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