By Charles Schillinger (Staff Writer)
Published: July 10, 2010

A rule proposed by U.S. Rep. Paul E. Kanjorski, D-11, Nanticoke, in a banking reform bill has been praised by a top economist as the one piece of the legislation that could help prevent financial institutions from becoming "too big to fail" in the future.

In an opinion piece for the Bloomberg business news website, the inclusion of the "Kanjorski Amendment" in a final bill before Congress is being called a "huge surprise" by Simon Johnson, the former chief economist of the International Monetary Fund and a professor at the MIT Sloan School of Management.

The amendment, proposed by Mr. Kanjorski creates a Financial Stability Oversight Council that will have authority to break up large firms that pose a "grave threat" to the financial stability of the nation. To take action against a firm, there would need to be seven votes of the 10-member council, which will be led by the treasury secretary and include the chairman of the Federal Reserve and other federal agencies.

"This is a big shift in responsibility, away from the Federal Reserve, which implicitly had all kinds of emergency powers but would never have taken such action," Mr. Simon said in his piece and a companion story on the Huffington Post news website.

Mr. Simon went on to say the Kanjorski Amendment was "an entirely reasonable reaction to the too-dangerous-to-fail experience of 2008-2009."

"The surprise here is that the bank lobbyists weren't able to get it taken out or entirely watered down," he said.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has already made it through both the Senate and House. A final bill was approved by the House on June 30 and awaits approval from the Senate and President Barack Obama.

Not all financial experts agree with Mr. Johnson's assessment the council will help prevent future crises. Bert Ely, an Alexandria, Va.-based banking consultant, questioned Mr. Johnson's "dangerous, naive belief in the efficacy of government regulation."

"It is highly unlikely they (the oversight council) would identify anything until after trouble erupts," Mr. Ely said. "In many cases, they're going to miss the emergence of the problems."

Mr. Kanjorski said in a statement his amendment would direct regulators to "pre-emptively rein in and break up" financial firms too big or too risky and that could pose a serious danger to the overall financial system.

"After this bill becomes law, I intend to hold oversight hearings through the Capital Markets subcommittee to ensure that regulators implement the Kanjorski Amendment as I intended," Mr. Kanjorski said. "Too many people have struggled financially as a result of this financial crisis, and we must do everything possible to prevent such circumstances from happening again."

Shawn Kelly, a spokesman for Hazleton Mayor Lou Barletta, called the banking reform bill a "colossal failure" because it did not address Fannie Mae and Freddie Mac, mortgage finance companies seized by the government that contributed heavily to Mr. Kanjorski's reelection efforts.

In an interview last week with Motley Fool, Mr. Kanjorski said the reform bill changes how mortgages will be written, but added there is more to do.

"Now we come back to the institutions themselves," Mr. Kanjorski told the financial news and analysis website. "We've held several hearings and we're going to hold several more. I'm hopeful, if we get the time in the fall, certainly the beginning of the next Congress, to have a package put together as to how to handle Fannie and Freddie."