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U.S. may slap fees on financial mega-firms to cut failure risk

July 23, 2009 |  4:30 am

How to deal with the vexing "Too Big To Fail" or "Too Complex to Fail" problem in the financial industry: Impose a TBTF/TCTF fee.

That is Federal Deposit Insurance Corp. Chairwoman Sheila Bair's proposal, and it appeared to be embraced by President Obama at his news conference late Wednesday.

From Bloomberg News:

President Obama signaled support for a proposal to impose fees on some of the nation’s largest financial firms to cover losses from risky transactions and avert another market meltdown.

Obama, at a White House news conference last night, said the U.S. may need a mechanism similar to the Federal Deposit Insurance Corp. for firms that engage in “some of these other far-out transactions” that put the financial system at risk.

“So if you guys want to do them, then you’ve got to put something into the kitty make sure that if you screw up, it’s not taxpayer dollars that have to pay for it, but it’s dollars coming out of your profits,” he said.

Sheilabair Bair, who will testify before the Senate Banking Committee today, is expected to call for the creation of a Financial Company Resolution Fund that would provide capital if the government has to step in and unwind a major financial institution -- presumably other than a big bank that would be covered by the FDIC's fund.

The collapses over the last year of Bear Stearns Cos., Fannie Mae and Freddie Mac, Lehman Bros. and insurer American International Group pointed up the government's need for a strategy to deal with the demise of huge non-bank firms whose troubles pose massive risks to the entire financial system.

From Bloomberg, which got an advance copy of Bair's testimony:

The government should impose “assessments on large or complex institutions that recognize their potential risks to the financial system,” Bair said. “This system also could provide an economic incentive for an institution not to grow too large.”

She urged the creation of a mechanism to wind down “large, systemically important financial firms” with no cost to taxpayers similar to the system already in place at the FDIC for resolving commercial banks and and thrifts.

“In contrast to the current situation, this new regime would not focus on propping up the current firm and its management,” Bair said. “Without a new comprehensive resolution regime, we will be forced to repeat the costly, ad hoc responses of the last year.”

A key question is which institutions should be required to pay into a fund. It wouldn't make sense to include insurance companies but to exclude large hedge funds, for example. And what about the mutual fund industry?

-- Tom Petruno

Photo: Sheila Bair. Credit: Carol T. Powers / Bloomberg News