Giant Mutual Fund Firms Attack a Piece of the Financial Reform Bill
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Tuesday, May 04, 2010

Giant Mutual Fund Firms Attack a Piece of the Financial Reform Bill

A number of large mutual fund firms have rallied together against one small piece of the financial regulatory reform bill being debated in the Senate. Bloomberg's Rebecce Christie and Robert Schmidt report that Vanguard (later joined by AllianceBernstein, Dodge & Cox, Franklin Templeton, Pimco, TIAA-CREF and T. Rowe Price) recently asked legislators remove a part of the bill that would give the Federal Deposit Insurance Corp. (FDIC) the right to pay out different holders of the same bonds at different rates when shutting down a giant financial services firm.

"Two holders of the same security could be paid different amounts," Bob Auwaerter, head Vanguard's fixed-income team, reportedly told Bloomberg. "That upsets the entire premise of the bankruptcy code."

"This would create distortions and give rise to increased risks in the bond market," added Vanguard chief investment officer George Sauter in a letter to Senators Chris Dodd (D-Connecticut) and Richard Shelby (R-Alabama), the chairman and ranking member of the Senate Banking Committee, respectively.

Sheila Bair, chairman of the FDIC, recently countered (in an interview with American Banker) that the FDIC would fully disclose if and when one creditor received such preference and claimed it would only happen when "essential to maintain critical functions and preserve value of assets to benefit all creditors." And Paul Nash, Bair's deputy for external affairs, told Bloomberg that the FDIC would also have "clawback" authority to get money back from those who receive preference.

"Any financial company that receives more than any other similarly situated creditor would have to repay that difference if there are losses," Nash reportedly said. "We don't support anybody getting more than they're entitled to."

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