Treasury outlines financial receivership bill
South Florida Business Journal
by Kent Hoover Washington Bureau Chief
Wednesday, March 25, 2009, 11:09am EDT
bizjournals.com
The Treasury Department outlined proposed legislation Wednesday that would allow the government to take over large financial institutions that are in danger of becoming insolvent.
This receivership authority would apply to institutions that aren’t regulated by the Federal Deposit Insurance Corp. and whose failure would have serious adverse effects on the U.S. economy.
The federal government now has only two options when non-bank financial firms start to collapse: provide taxpayer dollars to them, as in the case of insurance giant American International Group, or let them fail, as in the case of Lehman Brothers.
Under the proposed legislation, a federal conservator could sell the institution’s assets, renegotiate its contracts and address its derivatives portfolio. This would reduce the need to use taxpayer dollars to deal with the situation, according to the Treasury Department.
The legislation is patterned on the framework that governs the FDIC’s emergency resolution powers. It would authorize the government to intervene in limited circumstances. The decision as to whether to provide financial assistance or put it into receivership would be made by the Treasury Department and the FDIC.
Financial assistance could come in the form of loans, asset purchases, assuming or guaranteeing its liabilities, and/or purchasing an equity stake in the institution. The FDIC’s insurance fund would not be used to provide such assistance.
If the government takes over the institution, it could act as a conservator, with the goal of restoring the institution to solvency, or as a receiver, with the goal of orderly liquidating it. These roles differ from bankruptcy, because the priority is to minimize the impact of the institution’s failure on the economy rather than to address the rights of its creditors.
“One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions besides banks, but our current regulatory system provides few ways to deal with these risks,” Treasury Secretary Timothy Geithner said.
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