Geithner Asks Congress for Broad Power to Seize Firms

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http://www.washingtonpost.com/wp-dyn/content/article/2009/03/24/AR2009032401310.\

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Geithner Asks Congress for Broad Power to Seize Firms

By Branigin and Binyamin Appelbaum

Washington Post Staff Writers

Tuesday, March 24, 2009; 12:41 PM

Treasury Secretary F. Geithner asked Congress today for new regulatory

authority for non-bank financial institutions such as insurance giant American

International Group in order to " eliminate gaps in supervision " and avoid

potentially catastrophic threats to the nation's financial system.

Geithner said such authority would have allowed the government to bail out AIG

last year at a far lower cost to taxpayers, a position backed by Federal Reserve

Chairman Ben S. Bernanke. The government currently has the authority to seize

only banks.

Testifying before the House Financial Services Committee, Geithner also said

Treasury is working with the Justice Department to explore legal avenues to

recover AIG retention bonuses that have infuriated taxpayers and raised hackles

on Capitol Hill. He said his department will impose on AIG a contractual

commitment to pay the Treasury the amount of the retention awards from company

operations and will deduct an amount equal to those payments from $30 billion in

recently committed capital assistance.

In testimony at the same hearing, Bernanke defended the decision last year to

bail out AIG but weighed in against the retention bonuses, saying he had sought

to halt them.

AIG's payment of $165 million in retention bonuses to employees of its financial

products division prompted a public outpouring of anger in view of the company's

receipt of tens of billions of dollars in federal bailout money. The total

federal bailout of AIG has been reported at $173 billion, although the company's

government-appointed chief executive disputed that figure in a congressional

hearing last week, testifying under oath that AIG owes taxpayers about $78

billion.

The House last week overwhelmingly passed legislation that would tax 90 percent

of the retention payments. New York Attorney General Cuomo announced

yesterday that the majority of executives at AIG Financial Products, the

division that received the bonuses, had indicated their willingness to return

the retention payments.

Bernanke testified today that his reaction to the retention bonuses " was that,

notwithstanding the business purposes that might be served by this action, it

was highly inappropriate to pay substantial bonuses to employees of the division

that had been the primary source of AIG's collapse. " He said he asked that

payments to the AIG Financial Products division " be stopped but was informed

that they were mandated by contracts agreed to before the government's

intervention. "

Bernanke said he then asked that a lawsuit be filed to prevent the payments,

only to be advised by lawyers against doing so because if the suit failed,

punitive damages could double or triple the financial benefits to AIG-FP

employees under Connecticut law, which governs the division headquartered in

Wilton, Conn. He said he has directed Fed staffers to work with the Treasury and

the Obama administration to review whether the bonuses " can be reclaimed, "

adding, " Moreover, the Federal Reserve and the Treasury will work closely

together to monitor and address similar situations in the future. "

Geithner told the committee that he also had asked AIG chief executive M.

Liddy to renegotiate the bonus payments but was told they were " legally

binding. "

" I demanded that Liddy reduce future payments by hundreds of millions of

dollars, " Geithner said. " He committed to renegotiate the remaining retention

awards on terms consistent with the American Recovery and Reinvestment Act and

the administration's compensation guidelines. " Geithner referred to the $787

billion economic stimulus package.

The Treasury secretary also offered words of support for Liddy, telling the

hearing that the AIG chairman was being unfairly vilified over the bonuses,

which were agreed to by AIG's previous management. Geithner pointed out that

Liddy, a former Allstate Corp. executive, came out of retirement to take the

helm of AIG at the federal government's request for a salary of $1 a year.

" The issue of excessive compensation extends beyond AIG and requires reform of

the system of incentives and compensation in the financial sector, " Geithner

said.

In making his case for regulatory reform, Geithner told the committee, " AIG

highlights broad failures of our financial system. Our regulatory system was not

equipped to prevent the buildup of dangerous levels of risk. " He said the

federal government lacks the legal means at present " to manage the orderly

restructuring of a large, complex non-bank financial institution that poses a

threat to the stability of our financial system. "

He called for " new resolution authority " to give the federal government the

tools it needs to " unwind " an institution as big and complex as AIG. He said he

would testify before the committee Thursday to discuss regulatory reform

proposals in more detail.

Allowing the Treasury Department to take over a broader range of companies, such

as large insurers, investment firms and hedge funds, 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 government would also assume new authority under the plan to seize such

firms if they tottered toward failure.

Besides seizing a company outright, 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 AIG's agreement to pay retention bonuses to

employees of its 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.

" As we seen with AIG, distress at large, interconnected, non-depository

financial institutions can pose systemic risks just as distress at banks can, "

Geithner said in prepared testimony submitted to the committee. " The

administration proposes legislation to give the U.S. government the same basic

set of tools for addressing financial distress at non-banks as it has in the

bank context. "

He said this authority would allow the government to make loans to an

institution, purchase its obligations or assets, assume or guarantee its

liabilities and purchase an equity interest. As a conservator or receiver, he

said, the government " would have additional powers to sell or transfer the

assets or liabilities of the institution in question, renegotiate or repudiate

the institution's contracts (including with its employees), and prevent certain

financial contracts with the institution from being terminated on account of

conservatorship or receivership. "

The requested resolution authority would be modeled on that held by the Federal

Deposit Insurance Corp. with respect to banks, he said.

Bernanke backed Geithner's request, telling the committee that the AIG crisis

could have been avoided if the government had had the available tools in

September.

Defending the original decision to bail out AIG last year, Bernanke said the Fed

and Treasury " agreed that AIG's failure under the conditions then prevailing

would have posed unacceptable risks for the global financial system and for our

economy. " He said such a collapse likely would have caused the failure of other

major firms.

" 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, " he said. " Conceivably, its failure could have

resulted in a 1930s-style global financial and economic meltdown, with

catastrophic implications for production, income and jobs. "

Republican lawmakers used their opening statements to question who in the Obama

administration knew about AIG's retention bonuses and whether more could have

been done to stop them. They also voiced strong reservations about whether the

new administration's economic track record so far could support a move to

further expand its powers.

But Rep. Barney (D-Mass.), the chairman of the House Financial Services

Committee, seemed inclined to support Geithner's request, saying the government

should have the same power over all financial services firms that the FDIC has

over banks.

" Banks also failed in 2008, " said. " But the fact is that we have in place

mechanisms . . . that contained the damage. . . . We need to give somebody,

somewhere, in the federal government. . . the power to do what the FDIC can do

with banks. "

Appearing on television news shows this morning, White House spokesman

Gibbs said the administration wants " 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, " This is common sense. This isn't anything crazy. . . . 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. "

Staff writers Brady Dennis, Cho and Debbi Wilgoren contributed to this

report.

[Guest guest]

Sigh indeed. Good bye private banking. Good bye privacy in personal finances, what little there was left. Hello grand scale screwing up of the economy.

In a message dated 3/24/2009 2:32:27 P.M. Eastern Daylight Time, no_reply writes:

(Sigh)Administrator Feeling the pinch at the grocery store? Make dinner for $10 or less.