WASHINGTON — Treasury Secretary Timothy Geithner called Tuesday for new powers to regulate giant nonbank financial companies, such as insurance titan American International Group, whose failure would endanger the U.S. economy.
In a rare joint appearance before the House Financial Services Committee, Geithner and Federal Reserve Chairman Ben Bernanke said the AIG experience underscored that the Treasury needed to be able to take over failing financial institutions expeditiously, remove their bad assets and sell their good assets to competitors. The powers that Geithner seeks are similar to what the Federal Deposit Insurance Corp. has over national banks.
"The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, purchase its obligations or assets, assume or guarantee its liabilities and purchase an equity interest," Geithner said. "This proposed legislation would fill a significant void in the current financial-services regulatory structure with respect to nonbank institutions."
Geithner said, "AIG highlights broad failures of our financial system," and that it underscores why action must be taken to ensure that such dangers never menace the nation again.
The Obama administration will lay out more details of its proposed revisions for financial regulation Thursday. It will do so in advance of a G-20 meeting of leaders from the world's 20 major economies, at which Europeans will push hard for stronger regulation of global financial markets.
The White House has voiced wariness over ceding too much authority over U.S. markets to international institutions. However, President Barack Obama said Tuesday that he'd push at the G-20 meeting for greater regulation of hedge funds and other nonbank financial institutions that, like AIG, could affect the world economy.
Geithner said he'd give more details of the administration's regulatory plan Thursday when he testified again before the committee.
House Financial Services Committee Chairman Barney Frank, D-Mass., appeared supportive of the administration's call.
"We need to give somebody somewhere in the federal government . . . the authority to do what the FDIC can do with banks," Frank said. "It's called resolving authority, but giving somebody . . . a form of bankruptcy power given under the Constitution . . . allows us to avoid the choice of all or nothing: Nothing in the case of Lehman Brothers, all in the case of AIG."
Lawmakers grilled the two senior officials anew about the $165 million in bonuses paid to AIG employees. Geithner and Bernanke restated their displeasure over AIG's retention bonuses and vowed to work with Congress to prevent excessive bonuses or rewards going to the employees of firms that receive federal bailout money.
Bernanke testified Tuesday that he'd considered suing to block the AIG bonuses but his legal counsel persuaded him not to. Bernanke said that if the Treasury had the power it now sought, "the bonus issue would not have arisen."
"I share the anger and frustration of the American people, not just about the compensation practices at AIG and in other parts of our financial system, but that our system permitted a scale of risk-taking that has caused grave damage to the fortunes of all Americans," Geithner said.
However, while Geithner said he found the bonuses repugnant, he said that there was no choice but to pay them because they were part of legally binding contracts.
"We need to strike the right balance between encouraging investment and prudent risk-taking to get our financial system moving again, and, on the other hand, placing limits on executive compensation to avoid taxpayer-funded rewards for failure," he said.
Last week the House of Representatives rammed through legislation to levy a 90 percent tax on bonuses to employees with household incomes that exceed $250,000 a year at companies that receive at least $5 billion in federal assistance.
After financial industry executives began warning that such punitive terms may make them reluctant to cooperate with federal efforts to end the financial crisis, and after legal authorities warned that the legislation probably is unconstitutional, reservations began to emerge. Obama said on "60 Minutes" that he wanted to oppose rewarding bad behavior with bonuses but also wanted to ensure that his administration did nothing to impede economic recovery, and that he'd try to balance the two goals as he weighed whatever Congress did regarding the AIG bonuses.
AIG head Edward Liddy has asked his employees who got bonuses to return at least half of the amounts voluntarily. On Monday, New York Attorney General Andrew Cuomo said that nine out of 10 of AIG's top bonus recipients were returning all the money. He also said that 15 of the 20 largest recipients from AIG's Financial Products division had agreed to give back the money, an estimated $30 million.
The Senate is postponing debate on its own bill aimed at reclaiming the bonuses through taxes, a delay intended to let passions die down and reason prevail. Senate Majority Leader Harry Reid, D-Nev., said Tuesday that "the issue is not over, and that's an understatement," but didn't set timing for further action.
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