The House Financial Services Committee is holding a hearing on predatory-lending reform right now, but what they aren't working on is more interesting. Chairman Barney Frank told The Wall Street Journal that he won't be moving quickly on legislation that would allow the administration to take insolvent major financial institutions -- like, say AIG or Citi -- into recievership to fire managers, unwind toxic assets, and ultimately break them up. Whatever powers that are eventually granted to the executive will come as part of a larger regulatory-reform bill later in the year.
The change is a blow to Obama administration officials who have pushed aggressively for these powers, and leaves government officials without new tools to take over teetering companies during the next few months. It could also frustrate efforts by the Obama administration to convince foreign leaders that the U.S. plans to move swiftly to overhaul financial market rules.
I've made this point before, but this decision should make it clear that the main obstacle to more agressive action in the financial sector is Congress, through an aversion to appropriating the up-front costs of that action and trepidation toward authorizing a broad government intervention in the market. While many critics direct their concerns about a complacent response to the financial crisis at the Obama administration, more time needs to be spent building a viable coalition in Congress to support the kinds of tools and resources needed to take decisive action.
On the other hand, it is clear that the administration is concerned about the risks, and possible unintended consequences, of a recievership process. While time is of the essence in creating an effective recovery, these issues are complex, and due consideration needs to take place in structuring a response; we all recall how well the rushed TARP bill came out. Maybe Frank has a point about taking time on the project, and lord knows the Senate will take forever on its version anyways.
-- Tim Fernholz
