Geithner seeks new powers over financial companies - Fed, Treasury chiefs face grilling in Congress
Published: Wednesday | March 25, 2009
In a rare joint appearance in the United States Congress, the top men at the Federal Reserve and Treasury Department on Tuesday defended Obama administration proposals for new authority to seize failing banks, gobble up bad debts and sell good ones to healthy competitors.
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke also faced a grilling about American Inter-national Group Inc, the insurance colossus that paid out big bonuses to employees even after sustaining losses that set a corporate US record and taking a whopping US$180 billion in government assistance.
Bernanke defended action to prop up AIG, saying catastrophe loomed over the global economy if it collapsed.
"Its failure could have resulted in a 1930s-style global financial and economic meltdown, with catas-trophic implications for production, income and jobs," Bernanke said, referring to the decade of the Great Depression.
President Barack Obama, mean-while, was preparing for a televised prime-time news conference Tuesday in which he will tell Americans and the country's business community that excessive bonus and compensation payments are "of bygone days," according to his spokesman.
White House press secretary Robert Gibbs also said in television interviews Tuesday morning that the president will emphasise in opening remarks that all Americans - workers, investors and corporate titans - must understand their interdependence and work together to pull the country out of its worst financial and economic crisis in more than 50 years.
Bernanke told Congress he had wanted to sue to stop insurance giant AIG from paying millions in bonuses, but was talked out of it by legal staff.
They counselled, he said, against suing on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail.
AIG's financial products division has a base in Connecticut.
Geithner argued before the House of Representatives panel that he should be granted unprecedented power, after consultation with Federal Reserve board officials, to take control of a major financial institution and run it.
The treasury chief is an official of the administration, unlike the Federal Deposit Insurance Corp (FDIC), which is an independent regulatory agency.
Last week Obama said his administration would soon propose new financial industry oversight that includes a "resolution authority" with powers similar to those of the FDIC, which can seize control of banks, take over their bad assets and sell the good ones to competitors.
The plan would allow the Treasury secretary to seize control of a teetering non-bank financial company after consulting with the president and after securing backing from two-thirds of the Federal Reserve board, according to a document obtained by The Associated Press.
The broad powers would allow the Treasury secretary to set up a conservatorship or receivership for the ailing company.
The government would have the power to take control of the firm and sell or transfer parts of it to reduce its risky position, the document said.
The secretary also would be allowed to make loans, buy assets, guarantee loans and make equity stakes to help stabilise the company.
Geithner "will focus on the need for the government to address companies and markets that pose systemic risks to our financial system, ensuring that we close the gaps in the regulatory framework and that we never have to face situations like AIG again," Treasury spokesman Andrew Williams said.