Financial failure? Firms to pay, not taxpayers

The US has unveiled new draft regulatory measures which aim to ensure that stakeholders, not tax payers would share the losses in case of big failure of financial institutions.

Seeking to put in place stricter norms for big entities that pose a threat to the whole system, the Obama Administration has also proposed setting up financial services oversight council.

"Large, highly complex financial companies that fail will do so in an orderly and controlled manner, ensuring that shareholders and unsecured creditors bear the losses, not taxpayers...," according to a draft legislation by the House Financial Services Committee and the Treasury Department.

Rattled by the ravaging financial turmoil, many large American companies especially those in the financial sector, had to be rescued by the Federal government with taxpayers' money worth billions of dollars.

The legislation asserted that authorities would follow the "polluters pays model where the financial industry has to pay for their mistakes -- not taxpayers".

To strength the regulatory framework, the proposed bill would ensure that there is proper communication and co-ordination among various regulators.

Moreover, the US Federal Reserve would have "back-up authority" to step in if regulators fail to act quickly to address developing problems identified by the council.

The draft legislation pointed out that regulators' inability to see developments outside their 'narrow silos' allowed the current crisis to grow unchecked.

Fighting the worst turmoil in nearly 80 years, the Federal government would be tackling problems at big institutions through tailor-made options.

"Federal regulators will impose heightened standards through a variety of options tailored to the specific threat posed --there is no 'one size fits all' approach," the bill noted.

Unlike the traditional bankruptcy procedures which do not take into account 'complex inter-relationships' of large failing firms, the Federal Deposit Insurance Corporation would be empowered to unwind a falling company.

Such an approach would make sure that "existing contracts can be dealt with, creditors' claims can be addressed, and parties required to bear losses do so".

The US has seen the bankruptcy of many famed corporates including Wall Street major Lehman Brothers, auto makers -- General Motors and Chrysler -- in the last one year. While Lehman was liquidated, GM and Chrysler have emerged as leaner companies.

Further, the government had extended lifelines worth billions of dollars to financial services giants including Citigroup, Bank of America and American International Group.