Geithner says the Federal government needs more power to prevent bailouts

The issue is percolating on the one-year anniversary of Congress reluctantly passing a $700 billion rescue package after the failures at Lehman Brothers and American International Group (AIG) stoked a ferocious credit crisis.

{mosads}By crafting a series of new regulations — particularly one known as “resolution authority” — the Obama administration believes that future officials will not need to turn to Capitol Hill for bailout money. Resolution authority would allow the government to take over failing bank and non-bank institutions, break up their bad parts and eventually return them to the private sector.

“The most important thing to do is make sure banks and investors don’t live with the expectation the government is going to bail them out,” Treasury Secretary Timothy Geithner said in a briefing with reporters on Tuesday. “We have to make sure we build into our system the capacity to let institutions fail without igniting an inferno.”

In the absence of such a system, government officials in late 2008 turned to Congress for the $700 billion package, known as the Troubled Asset Relief Program (TARP). While the credit crisis has eased this year and most forecasters say the economy is beginning to grow, the debate over new regulations comes in the shadow of the still highly controversial program.

Some Republicans and other critics argue the milquetoast-sounding issue of “resolution authority” is an inflammatory debate over creating a “permanent TARP.”

The proposal has become one of the more contentious parts of a broader array of changes to the financial system that the Obama administration presented this year.

The administration, which drafted more than 600 pages of draft legislation, continues to push for Congress to pass new regulations by the end of 2009.

The push could be complicated by the ongoing debate in the House and Senate on healthcare legislation. Committees in both chambers are just now starting to debate the nuances of the administration’s financial reform plans, and neither the House Financial Services Committee nor the Senate Banking Committee has held a hearing to mark up major legislation.

Many of the proposals also are running into strong opposition from the financial industry and thorny questions from both Democrats and Republicans. House Financial Services Committee Chairman Barney Frank (D-Mass.) has already scaled back several provisions in one of the proposals for a new Consumer Financial Protection Agency.

Meanwhile, Senate Banking Committee Chairman Chris Dodd (D-Conn.) is eyeing a set of changes that look significantly different from the administration’s plans.

Dodd is considering the creation of a council of regulators to look out for “systemic risk.” The administration’s plan grants much of that responsibility to the Federal Reserve. Dodd also favors consolidating four banking regulators into one; the Obama administration proposed consolidating two of the regulators.

“We don’t need a super-regulator with many missions, but a single federal bank regulator whose sole focus is the safe and sound operation of our nation’s banks,” Dodd said on Tuesday. “A single operator would ensure accountability and end the frustrating pass-the-buck excuses that we’ve been faced with over these many months.”

The Obama administration has also discussed increasing the capital requirements for the country’s largest financial firms to ensure they are able to weather a crisis without excessive leverage.

“This so-called designation is a burden, not a privilege,” Geithner said.