Timothy Geithner: FED must be stripped of its AIG-like bailout powers

Would you like the hard earned taxpayer's money be put in a bottomless bowl in the name of bailing out a bleeding financial firm? The like that the US Federal Reserve put in the case of financial behemoths Bear Stearns and AIG? Or, Ctibank if you like. Check the image above!

Now, after inflicting all the damage that can ever be done the Obama administration is working on a reform proposal that can help limit the collateral damage arising out of firms such as the aforementioned ones. The proposed resolution aims at stripping the Federal Reserve of its authority to bail out financial firms in a crisis.

The idea is not take away fully from Fed its right to act as the lender of last resort, but to limit the right for being extended only to solvent firms undergoing a period of severe stress in the financial markets — that after obtaining a consent from the Treasury department.

Underscoring that in the proposed arrangement obtaining an open-bank assistance will not be possible for any failing firm, Geithner said: “Any firm that puts itself in a position where it cannot survive without special assistance from the government must face the consequences of failure.”

Gethner added, "We cannot put taxpayers in the position of paying for the losses of large private financial institutions. We must build a system in which individual firms, no matter how large or important, can fail without risking catastrophic damage to the economy.”

If the resolution comes about, mammoth firms that end up failing would find themselves in a Federal Deposit Insurance Corp managed receivership that would “unwind, dismantle, sell or liquidate the firm in an orderly way.” Losses accruing from such firms would be borne by creditors and shareholders alike.

The aim is to do away with a standing insurance fund which creates undue expectations that the government is always there to protect shareholders and creditors. A fund which in turn can breed mediocrity.

- myVox