Taking down failures: Who pays, when and how much?

By Jim Kuhnhenn


House Democrats are balking at an Obama administration plan that would put taxpayers on the hook for up to five years to dismantle any giant financial firm whose failure could repeat last year’s Wall Street collapse. The administration, through Treasury Secretary Tim Geithner, and House Financial Services Committee Chairman Barney Frank agreed last week to assess the costs of a government takeover on a failing company’s competitors. The companies would have 60 months after the fact to pay. Angry that such a plan would make taxpayers the first line of defense when a company implodes, Democrats now plan to propose making large firms prepay premiums into a special fund that would be tapped when calamity strikes, Frank’s spokesman said Monday. Call it insurance vs. pay-as-you-fail.  Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm that advises financial institutions, said in an interview that upfront payment is a better policy. Seeking to recoup the cost after a company fails, she said, “penalizes those left standing, so there’s no harm no foul to the failure.” Moreover, Petrou said, passing the cost of liquidation to other firms at a time of market stress would be counterproductive. “That’s why one of the proposals was to phase it in over time,” she said. “But the more gentle you make the post-failure assessment, the more taxpayers are at risk.”