WASHINGTON -- Treasury Secretary Timothy Geithner on Thursday scrambled to fight off attacks from all sides on a new Obama administration plan for tackling financial risk in the economy unveiled just two days ago.
After weeks of negotiations, the administration and Democratic Representative Barney Frank released a sweeping proposal on Tuesday to give regulators new powers to regulate, and even shut down, big financial firms threatening economic stability.
The financial services industry, not taxpayers, would bear the costs of government interventions to prevent the collapse of undercapitalized firms under the 253-page proposal, which tries to walk a middle line between bailouts and bankruptcy.
Both Democrats and Republicans broadly criticized the strategy at a public hearing convened by the U.S. House of Representatives Financial Services Committee chaired by Frank.
"The bill we're considering today would merely institutionalize 'too big to fail'," said Republican Representative Jeb Hensarling, referring to a perception that financial giants could count on government bailouts after the large-scale taxpayer help doled out in the last year.
Democratic Representative Brad Sherman said the Obama plan would provide "permanent, unlimited bailout authority."
He said it would give "unprecedented powers for the executive to decide spending and taxes, without congressional approval; and, depending on the desires of the executive branch from time to time, the greatest transfer of money from the Treasury to Wall Street in U.S. history."
From a long table facing lawmakers, Geithner pleaded for more time to explain his case.
"Without the ability for the government to step in and manage the failure of a large firm and contain the risk of the fire spreading, we will be consigned to repeat the experience of last fall. It's a really stark, simple thing," he said.
Geithner said the government would be able to prop up a failing firm only if the firm were in the process of "unwound, sold or liquidated," and he said bankruptcy would be remain the dominant tool for handling non-bank financial firm failures.
"But as the collapse of Lehman Brothers showed, the bankruptcy code is not an effective tool for resolving the failure of a global financial services firm in times of severe economic stress," he said.
FDIC ALSO LEVELS COMPLAINT
Obama, Geithner and Democrats on Capitol Hill have been working for months on proposals to tighten bank and capital market oversight, seeking to prevent a repeat of last year's confused Bush administration handling of the financial crisis.
Billions of taxpayer dollars were committed last year to rescuing firms such as AIG and Citigroup, while Lehman Brothers was allowed to collapse, and other firms were merged in emergency government-engineered deals.
Seeking a new way for government to deal with such crises, the bill unveiled on Tuesday would let the Federal Reserve limit credit exposures, block acquisitions, restrict pay and bonuses and, in extreme cases, order bankruptcy at financial holding companies that it finds are severely undercapitalized.
The Federal Deposit Insurance Corp -- already able to seize and dismantle failing banks -- could extend Treasury Department credit to solvent banks and non-bank financial firms alike to prevent financial instability, under the plan.
Losses from FDIC actions would be repaid later by other large financial companies under the plan. FDIC Chairman Sheila Bair, in testimony prepared for delivery to Frank's panel, argued instead for an assessment on big firms to pre-fund a resolution kitty.
Geithner would head a Financial Services Oversight Council, under the plan, in the latest iteration of a proposed systemic risk regulator that has been under development for months.
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