Regulator: 'Too big to fail' policy must cease

Congress reviews financial oversight

FDIC chairwoman Sheila Bair testified before the Senate Banking Committee yesterday with other federal regulators. (Carol T. Powers/Bloomberg News)

WASHINGTON - Giving the government new powers to seize big troubled companies became the focus of debate in Congress yesterday as lawmakers and the administration begin efforts to overhaul the nation's financial rule book.

The head of the Federal Deposit Insurance Corp. said the government's strategy of bailing out huge institutions deemed "too big to fail" must be replaced.

FDIC chairwoman Sheila Bair called for a system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system. A mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts, she said.

Testifying at a packed Senate Banking Committee hearing, Bair said simply creating a so-called systemic risk regulator "is not a panacea."

The committee's chairman, Senator Christopher Dodd, Democrat of Connecticut, said possibly the most important lesson to take from the financial crisis is that "no institution should ever be 'too big to fail.' "

Dodd suggested it could make sense to give the FDIC authority to take over and resolve big institutions whose collapse would threaten the financial system.

President Obama said Wednesday his administration soon will propose new financial industry oversight that includes a resolution authority with powers similar to those of the FDIC, which can seize control of banks, take over their bad assets, and sell the good ones to competitors.

The proposal would give the Treasury secretary the power, after consulting with the Federal Reserve, to take control of a major financial institution and run it. The Treasury chief is an official of the administration, unlike the FDIC, which is an independent regulatory agency.

Bair appeared with top regulators from the Fed, Treasury, and other agencies to lay out views on revamping oversight of financial institutions.

The government's rescue of insurance giant American International Group, its pumping of tens of billions of dollars into Citigroup Inc. and Bank of America Corp. in more than one instance, and other actions in the crisis have put a "too big to fail" stamp on US policy.

Also looming in the debate is deep congressional and public outrage over millions in bonuses paid to employees by embattled AIG, which has received $182 billion in federal bailout money. The Democratic-led House yesterday overwhelmingly approved a bill to slap punishing taxes on big bonuses from AIG and other firms bailed out by taxpayers.

If an agency with resolution authority had been operating, it would have been able to block the bonus payments by AIG, regulators said at the hearing.