By Brady Dennis
Washington Post Staff Writer
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.
The push for broader government authority was met yesterday with support and skepticism from legislators and firms that might soon be subject to more federal control, such as hedge funds, investment companies and large insurers.
Sen. Charles E. Schumer (D-N.Y.) backed the new authority. "Early, strong action is much better than letting these institutions bleed to death," he said.
On the other hand, House Minority Leader John A. Boehner (R-Ohio) expressed apprehension. "This is an unprecedented grab of power, and before that occurs, there ought to be a real debate about whether we should give that authority to the Treasury secretary," Boehner said.
Representatives of the hedge fund industry, while supporting the idea of establishing a regulator to monitor risks to the financial system, urged caution in proceeding with the specifics of the administration's proposal.
"These are complex issues, and it is critical for policy makers to have a firm understanding of the implications of these proposals on financial markets before taking extraordinary action, such as seizing the assets of non-bank financial institutions thought to be systemically relevant," said Richard H. Baker, president of Managed Funds Association, the largest lobbying group for hedge funds. "We are committed to being constructive participants in the dialogue regarding the creation of that framework, but do need to understand more fully the problems sought to be remedied with these proposals."
An official in the private-equity industry expressed concern about giving the Treasury secretary so much power. "Anytime you give a political entity sweeping powers, it's something that you want to be very careful about," the official said.
Traditionally, insurance companies have been regulated at the state level, and the safety net for insurance companies that become insolvent generally consists of other insurers. Inserting the federal government into the equation would raise a host of questions.
New York Insurance Superintendent Eric R. Dinallo said that insurance companies don't typically pose the same broad risks as AIG, which on the side was essentially running a hedge fund, known as Financial Products, that caused much of its problems. "I think AIG is, if not unique, is in a special category," he said.
Terri Vaughan, chief executive of the National Association of Insurance Commissioners, an umbrella group for state regulators, aired a similar view. "I would daresay there are few insurance companies that present systemic risk," Vaughan said. "I'm not sure I could point to any."
Geithner and Bernanke yesterday also called for the establishment of a regulator to monitor firms that pose wide risks to the financial system.
"The AIG situation highlights the need for a strong, effective, consolidated supervision of all systemically important financial firms," Bernanke said, saying it was important to install a regulator to "look at the system as a whole, to look for weaknesses in regulation, to look for problems in payment systems, to look for buildups of risky positions, to look for issues with derivatives and so on, to try to provide an overview of problems, in the financial system as a whole, as opposed to focusing solely on each individual institution in isolation."
Staff writers David Cho and David S. Hilzenrath contributed to this report.