Yesterday's tinfoil, today's reality...
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/24/AR2009032400847.html?hpid%3Dtopnews&sub=ARGeithner to Ask Congress for Broad Power to Seize FirmsGoal Is to Limit Risk to Broader EconomyBy Binyamin Appelbaum, David Cho and Debbi Wilgoren
Washington Post Staff Writers
Tuesday, March 24, 2009; 8:45 AM
The Obama administration will ask Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, White House spokesman Robert Gibbs said this morning.
Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill that was scheduled to address the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials say the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers.
The government at present has the authority to seize only banks.
"We need resolution authority to go in and be able to change contracts, be able to change the business model, unwind what doesn't work," Gibbs said on CNN in one of several morning television interviews aimed at promoting the administration proposal. " . . . This is the exact type of authority that will allow us to deal with the problems in AIG . . . that will address the systemic risk without having to put [a failing firm] in bankruptcy."
Geithner will testify alongside Federal Reserve Chairman Ben Bernanke. The hearing before the House Financial Services Committee follows last week's revelation that AIG 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. AIG chairman Edward M. Liddy testified before the same House committee last week, but Chairman Barney Frank (D-Mass) vowed 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.
Giving the Treasury secretary the power to seize a broader range of companies 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, according to an internal administration document.
The administration plans to send legislation to Capitol Hill this week. Sources cautioned yesterday that the details, including the Treasury's role, are still in flux.
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 document states, 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."
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 has 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 Federal Deposit Insurance Corp. Geithner has cited that structure as the model for the government's plans.
