Wednesday, March 25, 2009

Tapping AIG Furor, Regulators Seek Power to Seize Nonbanks

From the Wall Street Journal by Sudeep Reddy:

Treasury Secretary Timothy Geithner, left, talks with Fed Chairman Ben Bernanke before the start of a House hearing on AIG.

The government's top financial regulators are channeling widespread outrage over retention bonuses at American International Group Inc. to quickly win authority they have sought for much of the past year to seize nonbank companies and freeze their contracts.

The House Financial Services Committee plans to vote as early as next week on legislation that would give the government that authority. Federal officials already has such power over banks. The Obama administration is pushing for fast action on the issue, even before Congress tackles a broader overhaul of financial regulation.

Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, in congressional testimony Tuesday, said the lack of authority to seize AIG -- the way the Federal Deposit Insurance Corp. places failing banks into so-called receivership -- forced the government into the position of owning almost 80% of the insurance giant, and serving as its major lender, while lacking the power to stop multimillion-dollar bonus contracts signed before the government intervention.

"If a federal agency had had such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate," Mr. Bernanke said.

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At the Future of Finance Forum, Treasury Sec. Timothy Geithner discusses the need for better resolution authority to unwind large, complex institutions with WSJ's Executive Editor Alan Murray.

While the power seems likely to be granted by Congress, it's unclear which wing of the government would be given the authority. Mr. Geithner proposed that any emergency action be based on a determination by the Treasury secretary along with the Federal Reserve and the federal regulator overseeing the company.

He said that in addition to the power to seize a company, the proposed authority would give the government rights to sell or transfer assets or liabilities of the firm and renegotiate contracts, including those with employees.

Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, declined to say whether the power would be provided to the FDIC, the Treasury or some combination of the two. Speaking to reporters after Tuesday's hearing, Mr. Frank said that he had discussed the issue with President Barack Obama and that the committee would vote on a bill either next week or the following week. But the legislation would still be at least a few weeks away from enactment, because it must go through the Senate as well.

Several lawmakers expressed their displeasure with the AIG intervention during Tuesday's hearing. But the outrage that consumed Capitol Hill -- and much of America -- for the past week appeared to have softened.

Mr. Geithner and Mr. Bernanke have faced a storm of criticism since the disclosure 10 days ago that AIG had paid $165 million in bonuses to employees in the same unit that triggered many of its problems. But they blunted much of the anger by focusing their testimony on the limits to their authority and the regulatory holes that created the problems around AIG.

The two officials, joined by Federal Reserve Bank of New York President William Dudley, explained that they sought to block the bonuses but were advised of the limitations to breaking the contracts.

Mr. Bernanke said that upon learning of the payments, he asked that they be stopped. Informed that they were mandated by contracts, Mr. Bernanke said he "then asked that suit be filed to prevent the payments." But legal staff counseled against that because laws in Connecticut, where the AIG unit is based, could result in the "perverse effect" of doubling or tripling the payouts to those employees through damages.

Still, Messrs. Bernanke and Geithner on Tuesday faced continued criticism over other decisions on AIG and the wider government financial-rescue efforts. Mr. Bernanke was asked repeatedly about the tens of billions of dollars AIG has paid out to major banks, including foreign institutions, using government money. He maintained that AIG needed to meet its obligations to prevent a default that he said would cause "chaos in financial markets." He also noted that European governments have bailed out their banks without distinguishing between European and American creditors.

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