House Committee Votes To Defund Key Part Of Dodd-Frank

(Reuters) -- Republicans in the House of Representatives on Wednesday advanced a proposal to repeal a major section of the 2010 Dodd-Frank financial oversight law as part of a broader deficit reduction effort, a move Democrats derided as a misguided budget gimmick.

The House Financial Services Committee voted along party lines to repeal the section of the law that allows the Federal Deposit Insurance Corp. to liquidate large, failing financial institutions seized by the government.

This authority was included in the law in an attempt to avoid the type of market chaos and government bailouts that followed the bankruptcy of Lehman Brothers in September 2008 by giving the government a mechanism for better controlling the breakup of a financial giant.

Republicans have questioned whether the new authority will work and with budget deficits serving as a potent election-year issue they are proposing to eliminate it as a way to save $22 billion over 10 years.

Democrats accused Republicans of rolling back a reform intended to keep markets stable in order to get credit for phantom budget savings that will likely not materialize and are achieved only through gaming arcane congressional budget rules.

"What the Republican motion here does today is return us to 2008 where there is no capacity to deal, in a reasonable way, with a failed institution," said Rep. Barney Frank, D-Mass., the lead Democrat on the committee and an author of the law.

In place of the new liquidation regime, Republicans want large failing, financial firms to go through the bankruptcy process, which they want to tweak to better accommodate Wall Street giants. They are not, however, offering this proposal as part of their deficit reduction legislation.

On Wednesday Republicans argued the liquidation authority puts taxpayer funding on the line, a claim Democrats said misrepresents the law.

Under Dodd-Frank, the FDIC can borrow money from the U.S. Treasury to cover the cost of a liquidation. The regulator is then required, however, to charge large banks and other financial giants a fee to recoup these costs.

Democrats offered an amendment to collect the money up front so the FDIC would have less need to borrow in the future if a liquidation occurs. It was rejected.

"Whether you prefund it, post fund it, refund it, it's still a bailout fund," said Rep. Jeb Hensarling, R-Texas.

Analysts joined Democrats in questioning the legitimacy of the budget savings that could be achieved by eliminating the liquidation powers.

The Congressional Budget Office, which measures the fiscal impact of policies for Congress, projects the liquidation repeal would save $22 billion over the next 10 years.

The CBO arrived at this figure because it assumes it may take longer than the 10-year period covered by the budget to collect the fees from banks used to offset the cost of a possible liquidation.

"It's tough to understand where the $22 billion comes from - it's a wild assumption since there are currently no cash flows involved with this part of Dodd-Frank," Brian Gardner, an analyst at Keefe, Bruyette & Woods Inc, said in a research note.

The proposal has little chance of becoming law this year, even if it is passed by the full House, due to opposition from Senate Democrats and President Barack Obama.

It plays, however, into the election-year debate over record-high budget deficits.

The bill approved by the Financial Services Committee is part of a larger plan by House Republicans to find budget savings that is being assembled this month.

In addition to repealing the liquidation authority, the committee voted to save an additional $13 billion by subjecting the Consumer Financial Protection Bureau's budget to annual congressional approval, ending a foreclosure prevention program funded by the 2008 bank bailout law and by making changes to flood insurance programs.

(Reporting By Dave Clarke; editing by Carol Bishopric)