The Pitch for Expanded Powers
Wednesday, March 25, 2009
Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke pressed Congress yesterday to give the federal government unprecedented new power to seize financial firms beyond banks whose collapse could jeopardize the world financial system.
Inside a hearing room crowded with snapping cameras, petulant politicians and pink-clad protesters, the two men pointed to the troubled insurer American International Group as a cautionary tale, offering an ominous account of the global fallout that could have come if the company had collapsed in the fall.
"At best, the consequences of AIG's failure would have been a significant intensification of an already severe financial crisis and a further worsening of global economic conditions," Bernanke told the House Financial Services Committee. "Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs."
Despite those grave risks, the officials said, the government did not have the power to seize the insurance giant the way that the Federal Deposit Insurance Corp. can take over banks.
"No legal means existed under U.S. law to resolve AIG using the kind of powers available to the FDIC to resolve a bank," Geithner said of the federal bailout of AIG in September. "Because of the absence of authority, your government was faced with no good options."
Unless there is new legislation expanding the government's control over non-bank entities, Geithner said, the current laws would "continue to constrain our capacity to address future crises."
While Geithner and Bernanke were unified in calling for new authority to wind down non-bank financial firms, the men have yet to agree on who should get this new power. Geithner has urged that the Treasury secretary be given this authority, although traditionally such resolution power has rested with bank regulatory agencies. Bernanke, however, suggested that "the FDIC or some other body could be in charge of resolution and deals with those specific issues." Both men, however, agreed that the president should be involved in deciding whether and when to seize large, systemically important institutions.
Steven Adamske, a spokesman for Rep. Barney Frank (D-Mass.), chairman of the committee, acknowledged the differences between the Fed and the Treasury's proposals, but noted that the plan is "still in its infancy."
"No decisions have been made, yet," he said "We are a long way away from saying one proposal is better than the other."
Even as Geithner and Bernanke made their pitch for extraordinary new power, many committee members remained more interested in venting their continued outrage over $165 million in retention bonuses that were paid out this month to executives at AIG Financial Products, the unit whose flawed derivatives contracts brought AIG to the brink of collapse and prompted a federal bailout.
Geithner and Bernanke said they, too, shared the anger of the American people. Bernanke said he even considered filing a lawsuit to block the payments, but that the Federal Reserve's lawyers advised against it on grounds that the government could face even larger costs if it lost.
Bernanke said the dispute over AIG bonuses and other controversies dogging the government's rescue efforts could have been avoided if federal officials had the authority to seize AIG last fall. "That outcome would have been far preferable to the situation we find ourselves in now," he said.