The House Financial Services Committee passed a bill Wednesday that lawmakers say will prevent banks and other financial firms from growing so large that their collapse could disrupt the overall economy.
The controversial catch-phrase "too big to fail" is a hard pill to swallow for both lawmakers on Pennsylvania Avenue and taxpayers on Main Street, seeing as how this very label is what induced the government to dole out billions in bailout dollars to plug the hole of the nation's latest financial crisis.
The committee's newest reform measure is one of eight that are part of a comprehensive package of financial system changes called the Wall Street Reform and Consumer Protection Act, and House members say it will bring more accountability to both the lending community and Wall Street firms.
The "too big to fail" legislation cleared the House Financial Services Committee with a vote of 31-27, and is expected to make its way to the floor of the full House next week for consideration, along with the seven other measures that make up the panel's full reform package.
"We must bring to a close an era of massive taxpayer-funded bailouts, where banks and financial institutions gambled away Americans' hard-earned paychecks and engaged in practices that harmed consumers, punished responsible investors, shook the foundation of our markets, and left our economy reeling," House Speaker Nancy Pelosi said in a statement issued Wednesday.
The legislation approved Wednesday specifically targets the issue of systemic risk posed by such large companies as American International Group (AIG) and Lehman Brothers, whose troubles this year and last sent the economy into a tailspin. Currently, there are no procedures in place to wind down a failing firm whose demise could send shock waves through the entire financial system.
The bill (H.R. 3996) outlines what lawmakers call an orderly and responsible process for dismantling large companies on the brink of collapse, with shareholders and the financial industry itself on the hook to cover the cost of the unwinding rather than taxpayers. The expense of unraveling a firm would be taken from assets held by the company first, with any leftover costs covered by a "dissolution fund." The money in this government-held fund would come from pre-payments by all large financial companies with assets of more than $50 billion and hedge funds with assets of over $10 billion.
The legislation also calls for the creation of an inter-agency supervisory board that would be tasked with identifying and monitoring the activities of large, interconnected financial firms. Those deemed to pose a systemic risk to the national economy would be subject to tighter regulations and scrutiny.