Democrats and GOP to battle over future of too-big-to-fail

Market Watch ^ | 7/7/09

[FromLori]

WASHINGTON (MarketWatch) - When it comes to systemically significant financial institutions, when is a mega-bank too-big-to-fail?

This is a key question facing lawmakers on Capitol Hill as they contemplate an Obama administration proposal that seeks to set up a process to dismantle insolvent Lehman-like mega-financial institutions in a way that doesn't cause massive, collateral damage to the markets.

The White House proposal, which would partially pay off investors in the failing institution as a means of calming the markets, is under fire from Republicans and some Democrats on Capitol Hill who argue that such a move would cost taxpayers additional billions and cause incalculable harm to the capitalist system.

A key House of Representatives committee has scheduled a hearing next week to examine whether some institutions are too-big-to-fail and, if so, what should be done about it.

Critics of the Obama plan complain that it would designate certain firms as so systemically significant that investors would believe the government never would let them fail, all of which would lead to government-anointed winners and losers and additional taxpayer funded bailouts.

The GOP have put forward their own strategy that they believe would eliminate the need for government bailouts of large interconnected firms.

Republicans propose relying on the bankruptcy process, with a few tweaks. The GOP lawmakers would legislate a new chapter in the bankruptcy code that would authorize bankruptcy judges to freeze claims by derivatives counterparties during the restructuring process. In bankruptcy, creditor claims are already frozen, however derivatives counterparties have been exempted from this requirement.

The approach would also take steps to expedite the bankruptcy process overall so that large financial institutions are restructured and operating again quicker.

[razorback-bert]

I know how they would pick the ones too big to fail, donations, donations, donations.

[stephenjohnbanker]

Hold on to your wallet, and head for the nearest emergency exit!

[Iron Munro]

"too-big-to-fail"

Is this another snarky thread about Michelle's caboose?

[TexasFreeper2009]

Any company that is “too big to fail” should be broken up like Ma Bell was.

No company should be allowed to become so big that the government feels compelled to bail them out if they go down or risk the entire economy collapsing.