House bill aims to curb 'too big to fail'

WASHINGTON — In a sharp rebuke of Wall Street after a string of hefty bailouts last year, House Democrats are considering legislation that would let the government break up even healthy firms if regulators think they've grown too big.

Democrats also want to prohibit the Federal Reserve from directly lending to failing institutions.

"No more Fed (money) to AIG. No more Fed to Bear Stearns," said Rep. Barney Frank, referring to two major recipients of the Fed's emergency lending program.

The two provisions were expected to pass as part of a broader bill being considered this month by the House Financial Services Committee.

The legislation would set tougher standards for firms that grow so large and influential that regulators determine their failure could bring down the entire economy. It also would let regulators seize failing institutions, wipe out their shareholders and dismantle companies before their collapse frightens investors.

The full House was expected to vote on the bill and other financial reform proposals in early December.

Rep. Paul Kanjorski of Pennsylvania, a senior Democrat on the panel, wants to amend the bill so regulators could pre-emptively break apart any institution if they determine that its sheer size is a threat to the economy. A spokeswoman said the measure was still being drafted.

Frank, who chairs the Financial Services Committee, said he expects the proposal and a similar one by Rep. Ed Perlmutter, D-Colo., to pass because of the risk mammoth institutions can pose to the economy.

The Obama administration, which hasn't embraced the idea, has cautioned that size alone cannot determine whether a firm poses a threat.

A separate provision being considered would curb the Fed's emergency loan powers.

Under 1932 law, the Fed can issue loans in "unusual and exigent circumstances" when a borrower is unable to access enough credit from banks. During last year's financial crisis, the Fed invoked that power to try to spare major firms from collapse.

Frank, D-Mass., said the latest bill might establish a separate facility funded by the Fed to provide emergency loans. But "no entity would be allowed to borrow from that facility in times of a liquidity crisis unless they are very adequately capitalized," he told reporters.

Both measures still face scrutiny on the House floor and in the Senate, where Republicans hold more sway and Democrats are drafting their own legislation.

As early as Monday, Senate Banking Committee Chairman Chris Dodd, D-Conn., was expected to outline his plan to overhaul the nation's financial regulations.

Dodd was likely to give the Fed less power than Frank's proposal and merge bank supervision under a single regulator. Republicans were expected to oppose several provisions, including the establishment of a new government agency dedicated to protecting financial consumers.