Timothy Geithner Tricked on Halloween by Chairman Barney Frank as Fed Governor Bernanke Watches...

WASHINGTON (Dow Jones)--The top U.S. House Democrat crafting legislation to overhaul regulation of the financial services industry now supports having large financial firms pre-pay the costs to cover a large firm collapsing, a spokesman said.

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A spokesman for Rep. Barney Frank said the Massachusetts Democrat, who chairs the House Financial Services Committee, would seek to amend a broader system-risk bill to create the pre-paid fund. Frank, appearing on Bloomberg Television, said the initial fear that the existence of the fund could encourage risky behavior was unfounded.
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"It turns out that doesn't have any impact because everybody thinks it's going to be there anyway," Frank said, according to Bloomberg.
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The reversal comes the day after a number of Democrats on the Financial Services panel questioned the idea of collecting fees from the banking industry after the fact for a major failure. Rep. Luis Gutierrez, D-Ill., said the industry should pay to have a fund in place.
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"Most of us don't die and then buy a life insurance policy," Gutierrez quipped at a hearing.
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That position was echoed by Sheila Bair, chairman of the Federal Deposit Insurance Corp. She said collecting the fees after the collapse of a systemically important firm would punish the firms that did not fail.
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"It allows all large firms to pay risk-based assessments into the [fund], not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis," Bair said.
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Frank's reversal of opinion on the matter puts him at odds with Treasury Secretary Timothy Geithner, who on Thursday said having a pre-existing fund would create a moral hazard. It would send the message to creditors and market participants that they are insured against losses, he said.
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"We don't want to create that expectation, that's why we think it's better to do it after the fact," Geithner said, adding that "We want the ability to let them fail without the taxpayer being exposed to losses."
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Frank and the Treasury Department earlier this week introduced a draft proposal to regulate and wind down the largest financial firms, for the first time giving regulators the ability to take an overarching view of financial markets.
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-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com
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October 30, 2009 14:25 ET (18:25 GMT)
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