WASHINGTON — House Financial Services Committee members continued to clash Tuesday over how to end government-funded bailouts of the financial system, with Republicans charging that Chairman Barney Frank's approach would indoctrinate such an approach while Democrats said it would force the liquidation of risky firms at the industry's expense.
While a final vote is not expected until later in the week on legislation that would empower the Federal Reserve Board to dismantle firms that pose a systemic risk and expand the Federal Deposit Insurance Corp.'s powers to unwind such companies when they fail, the panel took steps Tuesday to fine-tune the bill.
The panel approved an amendment designed to beef up taxpayer protections by narrowing the scope of resolutions, and another to limit the power of the Fed system. The panel also approved an amendment that would focus resolutions on insolvent firms whose failure would have a destabilizing effect on the system, requiring that it be placed in liquidation and paid for by the company's own assets. It would also require any additional costs to be funded by assessments on "large financial companies."
Additionally, the panel approved an amendment from Rep. Gary Peters, D-Mich., that would specify that only the Fed Board of Governors can make a decision about what institutions are considered a systemic risk — not the regional bank presidents.
Frank said he plans to follow up the amendment with more reforms next year. "The Peters amendment is the first step," Frank said. "I doubt very much if about a year from now, if Fed presidents are going to have as big a role as they now have for instance on the" Federal Open Market Committee.
Frank said he was still working with other panel members on various amendments, but expected to include additional provisions that would set up a $200 billion fund to offset the costs of a systemic failure, and other measures that would target dismantling firms based on size and composition. The panel also plans to adopt a modified proposal pushed since 1983 by Texas Republican Rep. Ron Paul that would subject the Fed to an audit.
Most of the debate Tuesday centered around the philosophical divide over whether establishing a systemic-risk council and enhancing resolution powers would stop future bailouts or perpetuate them. "If you build it they will come," said Rep. Jeb Hensarling, R-Texas, the financial institutions subcommittee's senior GOP member. "If you construct a bailout fund either before the fact or after the fact, it is going to be used for bailouts."
Despite the heated discourse, Frank said there was actually much more consensus than is apparent on key points, particularly items related to the Fed. He saw support for limitations on the Fed's 13-3 emergency authority to provide assistance to firms and subject the central bank to audits.