Senate Rejects Proposal to Prevent Bailout of States

The U.S. Senate rejected an amendment to financial-regulation legislation aimed at preventing taxpayer bailouts of state and local governments that have defaulted or are at risk of defaulting on debt.

Senator Judd Gregg’s proposal, which would have barred use of federal funds to purchase or guarantee debt or extend lines of credit to governments facing default, failed to win the 60 votes required for adoption.

“They shouldn’t expect the federal government to come in and take them out of their distress,” Gregg said before the vote. “There should be nothing that’s too big to fail in this country, including state governments,” said New Hampshire’s Gregg, the top Republican on the Budget Committee.

The Senate is modifying Banking Committee Chairman Christopher Dodd’s sweeping plan for remaking financial-industry regulations, aiming to prevent a repeat of the 2008 credit crisis and respond to voter anger over the $700 billion bailout fund Congress approved for companies including Citigroup Inc. and American International Group Inc.

Gregg cited California, which is facing a $19.1 billion budget gap for the year starting July 1, as an example of why states shouldn’t be permitted to burden U.S. taxpayers.

“The people of California, because their government has been totally irresponsible in spending for a large number of years, has created a massive obligation, especially in their pension programs, their public pension programs which they can’t afford to pay,” Gregg said. “And why did they run up those obligations? So the people running for office in California could get elected.”

Dodd Opposition

Dodd opposed the amendment, saying the federal government should have the flexibility to extend aid to struggling states.

“In certain circumstances, local governments or state governments have made irresponsible choices,” Dodd said. “But you don’t blame the entire population of that state or locality because some leadership has made a bad choice.”

Senate Majority Leader Harry Reid filed a motion yesterday to end debate and hold a final vote on the bill. A vote on Reid’s motion may come as soon as tomorrow.

If approved, the Senate measure would have to be reconciled with a bill approved in December by the House of Representatives before President Barack Obama can sign it into law. Among other things, the legislation would create a consumer protection unit at the Federal Reserve and a council of regulators to monitor risks to the economy.

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

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