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House Panel Clears Systemic Risk Bill

Source: WSJ

Posted on 03 Dec 2009

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A broad financial overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve cleared a key House committee Wednesday.

By a vote of 31-27, on party lines, the House Financial Services Committee gave its final stamp of approval to a bill to create a new council of regulators that would wind down large institutions that pose a risk to the economy.

The measure marks the cornerstone of Chairman Barney Frank's (D., Mass.) financial regulatory agenda and is a critical part of the administration's overhaul plan. The goal is to stave off another Wall Street meltdown. "That's our goal -- is to A, make it less likely that this will happen and B, to be able to deal with it better when it does," Mr. Frank told reporters after the vote.

The committee vote was delayed for more than a week by members of the Congressional Black Caucus, who had expressed concerns that the government wasn't adequately addressing economic problems in their communities. Committee members on the CBC boycotted the vote. (See related article.)

Mr. Frank said the bill is slated to face a debate and vote on the House floor next week, where it will be combined with other financial regulatory measures on hedge funds, derivatives, investor protection and executive compensation.

Similar financial regulatory efforts are underway in the Senate, but a wide-ranging bill introduced by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) is on hold while committee members attempt to rework some of its provisions to attract Republican support.

In the House, meanwhile, Mr. Frank likely will attempt to tweak some of the language in the broader financial package during floor debate. He has said he will offer an amendment to remove language in an investor protection bill that would exempt small and mid-size companies from audits required under the Sarbanes-Oxley corporate-reform law.

One of the more lively discussions could involve a provision in the bill to remove restrictions on the Government Accountability Office's auditing authority of the Federal Reserve, giving it access to every item on the Fed's balance sheet.

The provision, introduced by Rep. Ron Paul (R., Texas), was approved in committee last month over the objection of Mr. Frank.

Mr. Paul for decades has championed abolishing the Fed, and he has garnered considerable bipartisan support in the House for additional auditing authority of the central bank.

After the committee vote, Mr. Frank indicated he doesn't intend to change Fed auditing language in the bill. "Absent some change in the way the public is reacting, I don't see any changes' in the Fed provision, he said.

It is possible other lawmakers will raise the Federal Reserve issue on the House floor.

The committee's bill to deal with systemic risk may be the most difficult of the administration's financial plan because of the competing agendas of regulators and policy makers' desire to use a deft touch with still shaky financial institutions.

The new regulatory council would be headed by the U.S. Treasury secretary. Also having votes would be the federal banking regulators, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Housing Finance Agency and the National Credit Union Administration.

The bill includes controversial language allowing the government to break up large, risky firms pre-emptively before they falter. The council could determine whether the size, concentration or interconnectedness of an individual firm "poses a grave threat to the United States." If the council reaches that conclusion, a company could face limits on its business practices or be required to sell or divest business units.

The measure also would direct the Federal Deposit Insurance Corp. to establish a special pool of funding to help dissolve large, troubled institutions.

Money for the fund would be collected through risk-based assessments on firms holding assets of $50 billion or more. Regulators would have the authority to assess payments on hedge funds with $10 billion or more in assets.

The dissolution fund would be capped at $200 billion.

In a statement, Securities Industry and Financial Markets Association President Timothy Ryan Jr. said his association firmly supports a systemic risk supervisor but has some concerns with a few provisions in the bill.

Specifically, Sifma opposes a provision requiring secured creditors take a mandatory 20% loss, or "haircut" in the event a financial firm collapses. Sifma also said it thinks the measure relies too heavily on banking regulations to resolve nonbank claims.