Senate OKs Landmark Powers to Dismantle Failing Firms

Senators Christopher Dodd and Richard ShelbyIn its first unified front on a Wall Street reform proposal, the Senate today approved 93-5 an amendment that outlines the orderly liquidation of large, failing firms that pose systemic risk, while tightening emergency funding programs by the Federal Reserve.
The revised proposal – an amendment to the broader reform bill that is still under debate – is meant to end the “too big to fail” posture that emerged at the height of the financial crisis in 2008 – and stirred pubic uproar over taxpayer-funded bailouts.
After weeks of talks, Sen. Christopher Dodd, chairman of the Senate banking committee, and Sen. Richard Shelby, the ranking Republican on the panel, reached a deal that eliminated a $50 billion liquidation fund that would have been paid by the largest institutions. Republicans had labeled it a bailout fund.
The amendment now calls for the Federal Deposit Insurance Corp. to unwind failing financial companies that could threaten U.S. economic stability, with shareholders and unsecured creditors bearing losses. Creditors of the failing firms will receive bankruptcy-like treatment. 
A council of regulators will determine if an institution should be dismantled, but any debt guarantees by the FDIC or Treasury will require Congressional approval.
At the insistence of Republicans, provisions were tightened to further restrict the Federal Reserve’s “ability to provide liquidity to the financial system in times of severe market distress,” Shelby said.
Before any emergency Fed lending can take place, there must be strict solvency and collateral requirements, and strict accountability standards, Shelby said.
“A resolution regime for large failing financial institutions is simply not credible unless we make clear in language that backdoor bailouts are impossible,” Shelby said.
Dodd said large bank holding companies that have received bailout funds from the government’s Troubled Asset Relief Program, TARP, “will not be able to avoid Federal Reserve supervision by simply dropping their banks,” under the new rules.
“These measures represent a fundamental change in our country’s ability to protect taxpayers from the economic fallout of having a large, interconnected firm collapse,”  Dodd said.
In a separate action, the Senate agreed to an amendment by Sen. Barbara Boxer, D-California, that would prohibit taxpayer dollars from being used to prop up failing firms.
The Senate now must reach agreement on proposals for a new consumer financial protection agency and strict regulations on derivatives trading. If it approves the broader bill, it will have to be reconciled with financial reform passed by the House in December.

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