The Obama administration's new proposal for tackling financial risk in the U.S. economy, unveiled just two days ago, came under attack on Thursday from all sides, with critics targeting its funding and scope.

Treasury Secretary Timothy Geithner scrambled in a congressional hearing to answer lawmakers and fellow regulators who questioned the plan, released by the Treasury and Democratic Representative Barney Frank after weeks of negotiations.

Amid concerns that a few elite financial giants have become too big to fail, the administration's plan would empower regulators to police, restructure, and even shut down large firms that threaten stability. It resembles the Federal Deposit Insurance Corp's power to seize and dismantle troubled banks.

From a long table facing a hearing room packed with lobbyists and lawmakers, Geithner pleaded his case.

Without the ability for the government to step in and manage the failure of a large firm and contain the risk of the fire spreading, we will be consigned to repeat the experience of last fall. It's a really stark, simple thing, he said.

Bankruptcy would be remain the dominant tool for handling non-bank financial firm failures, he said.

But as the collapse of Lehman Brothers showed, the bankruptcy code is not an effective tool for resolving the failure of a global financial services firm in times of severe economic stress.

Obama wants to make sure the Bush administration's confused handling of last year's financial crisis doesn't happen again.

That episode saw some firms, such as AIG and Citigroup, get multibillion-dollar bailouts. Others, such as Lehman Brothers, were allowed to collapse, while still others were forced into government-engineered mergers.

The 253-page Obama plan tries to strike a balance between bailouts and bankruptcy. It says financial services firms, not taxpayers, would foot the bill for future interventions.

HENSARLING CRITICIZES BILL

But Republican Representative Jeb Hensarling said at the committee hearing that the Obama resolution authority plan would merely institutionalize 'too big to fail'.

Democratic Representative Brad Sherman said it would give the administration power over spending and taxes, without congressional approval, and permit the greatest transfer of money from the Treasury to Wall Street in U.S. history.

The 253-page proposal is meant to mesh with a dozen other financial regulatory reform proposals being pursued by the administration and congressional Democrats.

Ranging from regulation of over-the-counter derivatives and setting up a financial consumer watchdog agency, to curbing bankers' pay and cracking down on credit rating agencies and hedge funds, the reform push has been making halting progress.

Final action is still months away. Frank's committee has approved some proposals, but votes by the full House await and the Senate has barely begun handling the matter.

Funding was a key point of criticism in the hearing on the resolution authority proposal.

As drafted, funding would not come from an established pool of money like the FDIC's bank insurance fund. Instead, firms with more than $10 billion in assets would be charged on a case-by-case basis to reimburse the Treasury for loans extended to the FDIC to finance interventions in failing institutions.

Questioning this arrangement, FDIC Chairman Sheila Bair argued that big firms should be asked to fund a kitty in advance.

Republican Representative Judy Biggert said the administration's funding proposal could create perverse incentives since survivors would have to foot the bill for firms that fail in financial crises.

Democratic Representative Luis Gutierrez said a pre-funded mechanism like the FDIC's fund makes sense and would not likely encourage financial firms to take on excessive risks.

But Geithner replied that a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses ... In essence, a standing fund would be viewed as a form of insurance.

(Additional reporting by Karey Wutkowski, Rachelle Younglai, David Lawder; Editing by Andrea Ricci)

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