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The concept of "too big to fail" companies has been a controversy for a while now, especially considering the events of the past two years. Wednesday a House committee voted on adding legislation that would enable the government the rather extraordinary power to break up large financial firms that they deem would pose a potential risk to the economy. There is debate over whether or not this power is excessive, according to an article in the LA Times.

The proposal by Rep. Paul E. Kanjorski (D-Pa.) would allow regulators to break up such big companies before their failure becomes imminent. It goes beyond the powers requested by the Obama administration to seize large firms on the brink of failure should their collapse threaten to damage the wider financial system.

"I recognize this is extraordinary power. Hopefully it will never have to be used," Kanjorski said. It would be used only if other regulatory measures did not reduce the potential threat of "huge, megalopolis-like" companies failing, he said. 

A new council of financial regulators would have authority to dismantle large operations. Under the plan, the forced divestiture of assets worth more than $10 billion could not take place without the Treasury secretary's approval. The forced divestiture of more than $100 billion would require consultation with the president.

The House Financial Services Committee voted 38 to 29 to add Kanjorski's proposal to legislation that would grant federal regulators so-called resolution authority to dissolve large financial firms teetering near bankruptcy. 

The Obama administration said it needs the authority to avoid situations such as last year's collapse of giant insurer American International Group Inc. The Federal Reserve bailed out the insurance giant because officials feared the economic chaos from a bankruptcy would have reverberated through financial markets worldwide.

The committee is expected to approve the broader legislation today.

There is quite a bit of opposition to this power and not everyone is on board.

Republicans on the committee strongly opposed the new breakup power, calling it "draconian" and "unconstitutional."

"When the government says you are too big and we're going to make you dismantle, that is a taking of private property rights in this country," said Rep. Randy Neugebauer (R-Texas). 

Large financial firms also adamantly oppose the proposal. Jamie Dimon, chief executive of JPMorgan Chase & Co., said last week that he endorsed enacting resolution authority to allow for the orderly dismantling of a large financial company on the brink of collapse. But he said financial firms should not be capped, in part because they would not be able to compete with huge banks based in other countries.

Still, the idea of breaking up financial giants before they can pose a threat to the system is gaining momentum.

Former Federal Reserve Chairmen Paul Volcker and Alan Greenspan recently endorsed the idea, as did the head of the Bank of England. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) proposes similar power in his bill to overhaul financial regulations.

But the Obama administration has been cool to the idea, preferring to force tougher regulations on huge financial firms, such as requiring them to hold more money as a cushion against losses. Under the administration's proposal, a firm would be broken up only when its collapse was imminent.

What is your take on the issue? Please feel free to comment.

Friday marked the signing of the Worker, Homeownership and Business Act of 2009 by President Obama, with the intended benefit of extending the first-time homebuyer tax credit as well as certain unemployment benefits. This could not come at a more critical time as the US unemployment rate has exceeded 10%. Housingwire had the following information on what it would mean for borrowers.