Obama backs move to seize financial firms

President Barack Obama has backed a bill in the House of Representatives that would give the US government unprecedented power to seize bank holding companies on the brink of collapse and saddle their competitors with the cost.

In a letter to House financial services committee chairman Barney Frank, Mr Obama said the belief among financial executives that the government would ultimately protect them created a “perverse incentive” for large firms to take reckless risks.

“Taxpayers simply must not be put in the position of paying for losses incurred by private institutions,” Mr Obama said in the letter.

Under Mr Frank’s proposal, a council of regulators would be set up to monitor financial firms regarded as so big and influential that their collapse could bring down the US economy.

If the council decides a firm has grown too big and dangerous, the Federal Reserve – the US central bank – could step in to dismantle it. Firms with more than $10bn (€6.75bn) of assets would be responsible for covering any outstanding costs.

The agreement paves the way for the bill’s swift approval. Mr Frank’s committee is expected to consider it next week with a floor vote anticipated as early as November.

The proposal is the latest step by Mr Obama and congressional Democrats to overhaul the regulatory framework governing financial institutions and clamp down on the kind of risky market bets that contributed to last year’s market crisis.

Republicans will probably oppose the measure because they say it would create the expectation that some companies will be bailed out by the government because of their designation as being critical to the health of the economy.

Democrats argue that the bill will prevent future bail-outs because it will enable regulators to dismantle these firms.