New Wind-Down Plans Lack Clarity: Fed's Lacker

The Obama administration's plan to make it easier to wind down a big financial firm that gets into trouble is not clear and must exclude the use of taxpayer money, a top Federal Reserve official said Monday.

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"Effective resolution reform should limit the discretionary use of public funds," Richmond Federal Reserve President Jeffrey Lacker told the Charlotte area chapter of the Risk Management Association in prepared remarks.

"The real lesson from Lehman, in my view, is that officials should make a clear commitment about what institutions they will not support," said Lacker, who is a voting member of the U.S. central bank's policy-setting committee this year.

President Barack Obama said earlier on Monday that the country could not go back to the reckless behavior and unchecked excess of the past in a speech on Wall Street to mark the one-year anniversary of the collapse of Lehman Brothers.

The Obama administration proposes major regulatory changes to give the Fed responsibility for overseeing the most systemically key financial firms, create a financial services consumer watchdog and make failing firms easier to wind down.

"Our plan would put the cost of a firm's failures on those who own its stock and loaned it money," Obama said.

The failure of investment bank Lehman sparked a global crisis and inflicted the worst U.S. recession since the Great Depression, forcing the Fed to cut interest rates to almost zero and flood financial markets with hundreds of billions of dollars to keep them open.

Lacker said that Obama's plans for resolution authority aimed at providing a less disruptive alternative to bankruptcy filing, with the hope that such an authority could credibly be expected to impose appropriate losses on the creditors of a big firm that got into trouble and had to be wound down.

"The description of this proposed resolution authority leaves it unclear how it would establish such a credible commitment," Lacker said.

"Uncertainty about whether such an authority will intervene to supersede the provisions of bankruptcy law and which creditors will benefit from public funds is likely to intensify financial market turmoil in the event stresses arise," he said.

One way to clarify the situation is to strictly limit the ability of the U.S. central bank to lend under special powers contained in article 13.3 of the Federal Reserve Act if it deems circumstances to be "unusual and exigent".

"I would favor revisions that specify more clearly the circumstances in which the Fed can extend such credit and forms that such credit can take," Lacker said, adding that he would also limit this assistance to just a few days.