- The Washington Times - Friday, July 24, 2009

The Obama administration sent Congress a new proposal Thursday that would allow the federal government to take over failing financial companies in a way that might avoid a repeat of the $700 billion bailout of firms deemed “too big to fail” passed last year by Congress.

The plan would give the Treasury Department the authority to designate the Federal Deposit Insurance Corp. (FDIC) or the Securities and Exchange Commission (SEC) as the conservator for troubled financial companies that pose a threat to the economy.

The FDIC and SEC would have a sweeping powers over the company, including the authority to take control of the firm’s operations and to sell or transfer all or any assets.

The conservator also would have the power to provide loans, assume liabilities and inject capital - subject to certain checks and balances and only if a systemic risk determination has been made.

The authority allowing a federally sponsored takeover of a financial institution would supplement, not replace, existing laws under the Federal Deposit Insurance Act, and would require approval by the Fed and FDIC or the SEC, as well as the Treasury Department.

The administration’s efforts to exert greater control over the nation’s financial system is in response to the $700 billion Troubled Asset Relief Program, or TARP, which has been credited with avoiding a catastrophic Wall Street meltdown but criticized by both parties for allowing recipients to spend the money with too few restrictions.

The move was met with a positive response from many industry groups.

“No institution should be too big to fail,” said Erica Hurtt of the Financial Services Forum. “Failure is an all-American concept because the discipline of potential failure is necessary to ensure truly fair and competitive markets.”

The proposed legislation is an update of a proposal floated by the White House last month to step up regulation of nearly every financial institution while extending government control to markets and players such as hedge funds that escaped supervision in the past.

Thursday’s plan would merge two federal bank regulators, the Office of Thrift Supervision and the Office of the Comptroller of the Currency, into a new agency called the National Bank Supervisor.

The measure also would require the Federal Reserve, FDIC and the National Bank Supervisor to adopt joint rules on bank regulatory fees intended to eliminate “regulatory arbitrage” - a simultaneous purchase and sale in two separate financial markets in order to profit from a price difference between them - that financial institutions have exploited in the past.

The legislation requires that fees on national banks with less than $10 billion in assets cannot be higher than the average charged by states for banks of similar size.

The White House also has promised to draft a plan soon to revamp regulation of complex derivatives market, which was blamed in part for the near collapse of U.S. credit markets last year.

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