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US Needs 'Resolution Authority' For Big Firms: Frank

Tuesday, 31 Mar 2009 | 8:03 AM ET

House Financial Services Chairman Barney Frank (D-Mass.) says the drastic steps the Obama administration is taking in dealing with the nation's struggling automakers further underscores the need for the government to have so-called resolution authority to take over and unwind the businesses of big non-bank companies.

Barney Frank
AP
Barney Frank

"We need to come up with a way to wind down nonbanks without it being all or nothing." Frank told CNBC. "We may have to do that with GM. I hope we don't have to." (See video below.)

Rep. Frank's comments came after the Obama administration pushed out General Motors' Chairman and CEO Rick Wagoner and essentially ordered Chrysler to pursue a merger with Italy's Fiat, as part of its response to the two automakers' restructuring plans, which were required under the government aid package approved in the waning days of the Bush administration.

Frank's committee has made resolution or unwind authority a top legislative item, partly because President Obama asked for it to be fast-tracked two weeks ago. Government officials say such regulatory authority is needed to deal with firms that fall under the "too-big-to-fail" concept, meaning their failure would have a nation-wide effect.

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Right now the government can take that approach with commercial banks and thrifts holding government-insured deposits but the problems of other companies need to be resolved through bankruptcy court, either through liquidation or restructuring.

GM and Chrysler have already received $17.4 billion in loans from the federal government and are seeking about $20 billion more.

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Frank said government aid is necessary, even if politically unpopular, because an "unregulated collapse of this [auto] industry would be seriously exacerbating" to an already weak economy. Frank added another course of action might have been possible if the economy was strong.

Legislation for the resolution authority isn't expecxted to be marked-up by Frank's committee until after Congress returns from its Easter recess, which starts April 6.

The nonbank resolution authority would apply to a number of sectors, including insurers like AIG, now majority-own3ed by the government.

Frank also repeated his recent case for adjusting the mark-to-market accounting rule, which many blame for aggravating the balance sheets of large financial firms.

Frank said he does not want to change or drop the rule, but instead wants "regulators to be able to show some discretion in how they react" to chages in the condition of firms' balance sheets, such as when they write down the value of loans.

There's relatively broad support in Congress for such the proposal and the SEC is currently considering it.

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