A key House panel voted on Wednesday to give the federal government broad new powers that could be used to break up large financial firms before they fail.

The House Financial Services Committee voted 38-29 to support an amendment sponsored by Rep. Paul Kanjorski (D-Pa.) that drew strong objections from Republicans and wariness from some centrist Democrats.

Kanjorski said his amendment to the sweeping financial overhaul legislation was inspired by a belief that lawmakers would not vote for future emergency bailout funds like they did a year ago with the $700 billion bailout package.

“We’ve gone to the edge. We’ve almost seen a world meltdown. What I’m saying is before we get back into those circumstances, we’re going to cure that,” Kanjorski said.

Democrats Reps. Gregory Meeks (N.Y.), Dan Maffei (N.Y.) and Melissa Bean (Ill.) joined all Republicans in opposition to the amendment.

The Obama administration and congressional lawmakers have been wrestling with how to end government bailouts and the problem of firms that are “too big to fail.” But Kanjorski’s measure goes a step further than lawmakers and President Barack Obama had originally proposed.

The Kanjorski measure requires federal regulators to look closely at the 50 largest financial firms by assets and determine whether their size, scope, interconnectedness and other factors need additional regulation.

Regulators would then be able to impose stricter regulations, limit a firm’s ability to merge and also possibly sell or divest parts of the firm. Companies would be able to submit their own business plans, subject to approval from a council of regulators in advance of the government taking action.

The Treasury Secretary would need to sign off on a regulatory move to divest more than $10 billion of a firm’s business. The president would need to be consulted on a divestiture of more than $100 billion.

The provision will continue to face stiff opposition from Republicans and large financial institutions, and it faces an uncertain future with the full House and Senate. The Senate Banking Committee on Thursday will begin marking up overhaul legislation.

The Financial Services Forum and New York City business interests strongly urged lawmakers to oppose the amendment, and they argued that there is nothing inherent in large companies that make them riskier.

“Proposals to preemptively break up large, well-managed and well-capitalized institutions are concerning and potentially damaging to economic growth, job creation, and our nation’s international competitiveness,” said Rob Nichols, president of the Financial Services Forum.

The Financial Services Committee also approved amendments that would allow the Federal Deposit Insurance Corporation (FDIC) to run a program in the future to provide liquidity to solvent banks. Companies that chose to participate in the program would be subject to fees.

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By Silla Brush
November 18th, 2009