Oct. 31 (Bloomberg) -- Barney Frank, chairman of the U.S. House Financial Services Committee, reversed course on paying to unwind failed financial firms, splitting with the White House and setting up a possible fight with the biggest companies.

Legislation Frank crafted with the Treasury Department and unveiled this week will be amended to impose a fee on financial institutions with more than $10 billion of assets before any firms fail, he said yesterday on Bloomberg Television’s “Political Capital with Al Hunt.” The Obama administration wants to collect fees after a company fails.

“If you wait until after the fact, you would then have to go to the taxpayer first and get the assessment to repay it and some people are afraid that would never happen,” said Frank, a Democratic representative from Massachusetts.

Frank in the interview also said the U.S. House will vote in December on his committee’s regulatory-overhaul package. Frank called “excessive” the record amounts set aside for bonuses by Goldman Sachs Group Inc. and other companies. The lawmaker also said Congress should use repaid bank rescue funds to help unemployed homeowners avoid foreclosure and he would increase aid to state and local governments.

Regulators agree that large companies should pay into the fund to resolve failed firms, sparing taxpayers who were forced to finance a $700 billion bailout last year after Bear Stearns Cos. and American International Group Inc. almost collapsed.

At issue is whether companies are tapped in advance or after a failure. Frank joins Federal Deposit Insurance Corp. Chairman Sheila Bair and community bankers in seeking to have the largest U.S. financial firms pay whether or not a firm collapses. The financial services industry and the Obama administration prefer using taxpayer funds to take apart a failed firm and having the industry later repay the costs.

Industry Opposition

The Financial Services Roundtable, representing many of the largest U.S. companies, said paying in advance will tie up much- needed capital.

“It will expose the industry to an undefined expense at a time we are rebuilding the deposit insurance fund and the economy,” said Scott Talbott, the group’s senior vice president of government affairs. “A pre-funded assessment would take the total tab to hundreds of millions of dollars per institution.”

The proposal would require 116 U.S. banks along with financial firms with more than $10 billion in assets to support the fund. Those banks represent 1.4 percent of the nation’s 8,195 banks, according to FDIC data.

Bair said prepayments make all companies responsible and avoids letting a failed company escape liability. Treasury Secretary Timothy Geithner said building a fund in advance could encourage more risk taking.

‘Create Expectations’

“A standing fund would create expectations that the government would step in to protect shareholders and creditors from losses,” Geithner told Frank’s committee Oct. 29.

While Frank had agreed with the administration, he said yesterday that the concern Geithner described as a “moral hazard” would exist whether companies pay before or after a failure.

“The fear that the administration had, that I shared, was if you put it out there beforehand, that will be announcement to people that it’s available and they might behave irresponsibly,” Frank said. “It turns out that doesn’t have any impact because everybody thinks it’s going to be there anyway.” Frank’s committee is scheduled to meet next week to begin considering changes to the legislation.

Republicans oppose letting the government disassemble failed firms, saying they would prefer to use bankruptcy laws. Republicans also criticize the administration for intending to keep secret the list of risky firms.

Regulator Council

The Frank legislation creates a council of regulators, which includes the Federal Reserve and the FDIC, to monitor large financial firms and the economy for systemic risk. The FDIC would get power to take apart companies whose failure would pose a risk to the economy. A similar Senate bill hasn’t been proposed.

On executive compensation, Frank said he opposed record bonuses being set aside at some of the largest banks, acknowledged Congress was limited in its powers and urged the Senate to pass legislation giving shareholders more of a voice on executive pay.

“If I were a shareholder, I would be very unhappy at overcompensating some of these people,” Frank said yesterday. “I would tell them that they are missing the anger they have kindled in the American people. If I were they, I would substantially reduce them.”

Goldman Sachs set aside $16.7 billion for compensation and benefits through September, up 46 percent from a year earlier and enough to pay each worker $527,192, the company said Oct. 15. JPMorgan Chase & Co. allocated $8.79 billion for investment bank employees, or $353,834 each, and Morgan Stanley had $10.9 billion for compensation, or $175,344 for each worker.

Frank’s panel has approved legislation to create a Consumer Financial Protection Agency, regulate the $592 trillion derivatives industry and make it easier to sue credit-rating companies over their assessments.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: October 31, 2009 00:01 EDT