Obama readies tougher 'too big to fail' strategy

By Kevin Drawbaugh

WASHINGTON (Reuters) - The Obama administration on Monday was moving to toughen its strategy on financial firms seen as "too big to fail," with a new proposal expected in days to restrict bailouts and shut down large distressed firms.

An administration official said the new proposal to Congress would let the government seize control, force shareholders to bear losses, remove management, and restructure debts at non-bank financial firms whose failure could threaten the banking system and economy.

It will attack a market perception -- reinforced by last year's massive Bush administration bailouts of banks and Wall Street firms -- that some financial groups are so large and interconnected the government will never let them fail.

"We need to end 'too big to fail,' " said Federal Deposit Insurance Corp (FDIC) Chairman Sheila Bair at the American Bankers Association annual convention on Monday.

The administration's new strategy was still being hammered out late on Monday by Treasury Department officials and staffers for the House of Representatives Financial Services Committee, the likely conduit for its release within days.

It comes in a week when more incremental progress is expected in Congress for President Barack Obama's broader push to tighten bank and capital market regulation in the aftermath of the worst financial crisis in decades.

The regulatory reform push is facing stiff resistance from an army of lobbyists for banks and Wall Street, but it taps an upswell in public anger over a return to enormous bonuses for executives at firms bailed out by taxpayers just months ago.

The House Financial Services Committee on Tuesday and Wednesday will debate bills to require hedge funds to register with the government, and to crack down on credit rating agencies like Moody's (MCO.N: Quote, Profile, Research) and Standard and Poor's (MHP.N: Quote, Profile, Research).