The government at present has the authority to seize only banks.
Allowing the Treasury Department to take over a broader range of companies, such as large insurers, investment firms and hedge funds, would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president’s Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators.
"Our system permitted a scale of risk taking that has caused grave damage to the fortunes of all Americans," Geithner said in testimony before the House Financial Services Committee. " . . . We must create a new resolution authority so that the federal government has the tools it needs to unwind an institution of the size and complexity of AIG."
The administration plans to send legislation to Capitol Hill this week. The hearing on Capitol Hill was scheduled to address the furor over bonuses paid to executives at AIG, which the government has propped up with about $180 billion in federal aid. The company paid more than $165 million in retention bonuses to employees at its Financial Products division, the same unit whose complex derivatives largely precipitated the company’s downfall.
Republican lawmakers used their opening statements to question who in the Obama knew about the bonuses and whether more could have been done to stop them. They also voiced strong reservations about whether the new administration’s economic track record so far could support a move to further expand its powers.
But committee Chairman Rep. Barney Frank (D-Mass.) seemed inclined to support Geithner’s request, saying the government should have the same power over all financial services firms as the Federal Deposit Insurance Corporation does over banks.
"Banks also failed in 2008 . . . But the fact is that we have in place mechanisms . . . that contained the damage," Frank said. " . . . We need to give somebody, somewhere in the federal government. . . the power to do what the FDIC can do with banks.
Geithner testified that the AIG debacle "highlights broad failures of our financial system. Our regulatory system was not equipped to prevent the build up of dangerous levels of risk . . . The U.S. government does not have the legal means today to manage the orderly restructuring of a large, complex, non-bank financial institution that poses a threat to the stability of our financial system."
Appearing on television news shows this morning, White House spokesman Robert Gibbs said the White House wants "resolution authority to go in and be able to change contracts, be able to change the business model, unwind what doesn’t work." Geithner is testifying alongside Federal Reserve Chairman Ben Bernanke, whose said in his opening statement that he wanted to file a lawsuit to prevent AIG from paying the bonuses but was advised by counsel that to do so would be too risky.
The administration’s proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed’s other responsibilities, particularly its control over monetary policy.
The government also would assume the authority to seize such firms if they totter toward failure.
Besides seizing a company outright, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.
The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.
"This is common sense. This isn’t anything crazy," Gibbs told CNN. " . . . If the Treasury had resolution authority on AIG, you wouldn’t have to put it in bankruptcy to change executive compensation, you could do that automatically."
AIG chairman Edward M. Liddy testified before the same House committee last week, but Frank vowed at the time to hold a second hearing "to more thoroughly examine the oversight of the federal government’s intervention" at AIG.
Last week, the House overwhelmingly passed legislation that would tax 90 percent of the retention payments. Yesterday, New York Attorney General Andrew Cuomo announced that the majority of executives at AIG Financial Products had indicated their willingness to return the retention payments they had received, and Senate leaders said they will put off consideration of their version of the tax bill.
Geithner plans to lay out the administration’s broader strategy for overhauling financial regulation at another hearing on Thursday.
The authority to seize non-bank financial firms emerged as a priority for the administration after the failure of investment house Lehman Brothers, which was not a traditional bank, and the troubled rescue of AIG.
"We’re very late in doing this, but we’ve got to move quickly to try and do this because, again, it’s a necessary thing for any government to have a broader range of tools for dealing with these kinds of things, so you can protect the economy from the kind of risks posed by institutions that get to the point where they’re systemic," Geithner said last night at a forum held by the Wall Street Journal.
The powers would parallel the government’s existing authority over banks, which are exercised by banking regulatory agencies in conjunction with the FDIC. Geithner has cited that structure as the model for the government’s plans.
Staff writer Brady Dennis contributed to this report.