Officials: Increase regulation: Geithner, Bernanke call for powers to deal with institutions like AIG

The nation's top economic officials argued yesterday for unprecedented powers to regulate and even take over financial companies whose collapse could imperil the entire economy. President Obama agreed and said he hopes that "it doesn't take too long to convince Congress."

Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, in a rare joint appearance before a House committee, said that the messy federal intervention in American International Group, a major insurance conglomerate, demonstrated a need to regulate complex nonbank financial institutions just as banks are now regulated by the Federal Deposit Insurance Corp.

"AIG highlights broad failures of our financial system," Geithner told the House Financial Services Committee. "We must ensure that our country never faces this situation again."

Geithner suggested that his Treasury Department's powers be expanded. Bernanke was noncommittal, even suggesting the FDIC.

Both officials tried to channel the public outrage over the millions of dollars that AIG spent in post-bailout bonuses into support for regulatory overhaul.

Dealings between Congress and Geithner have been tense at best. But they were a little more relaxed in the afterglow of Monday's nearly 500-point surge in the Dow Jones industrials, though the Dow gave back about 116 points yesterday. The rise came in large part in response to the administration's introduction of a public-private program to buy up to $1 trillion in bad loans and toxic mortgage-related securities clogging bank balance sheets.

Geithner is expected to lay out more details on the administration's plan Thursday when he appears again before the committee. Democrats in the Senate say that the administration wants the proposal on taking over nonbanks to move separately from the larger financial-industry regulatory bill, to get it going more quickly.

At the White House, Obama told reporters: "We are already hard at work in putting forward a detailed proposal. We will work in consultation with members of Congress. That will be just one phase of a broader regulatory framework that we're going to have to put in place to prevent these kinds of crises from happening again."

Rep. Barney Frank, D-Mass., the committee chairman, said that "when nonbank major financial institutions need to be put out of their misery, we need to give somebody the authority to do what the FDIC can do with banks."

The government has given AIG more than $180 billion in bailout money since it first intervened last Sept. 16. The government now owns nearly 80 percent of the insurer.

"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," Bernanke said.

Geithner and Bernanke told the committee that they did not become aware of the $165 million in AIG bonuses until March 10, just days before the payments were made. However, lower-level officials at both agencies were aware of the payments.

At the time of the first AIG bailout, Geithner was the president of the New York Fed, which helped oversee the government intervention.

AIG is an internationally interconnected colossus, with 74 million customers and operations in more than 130 countries.

"Its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs," Bernanke told the panel.

Bernanke said that it was "highly inappropriate to pay substantial bonuses" in such a situation.

He said he had asked that the payments be stopped but was told that they were mandated by contracts.

"I then asked that suit be filed to prevent the payments," he said.

But Bernanke said that his legal staff counseled against this action "on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail."

Separately, the attorney general of Connecticut, Richard Blumenthal, said that the Fed "never contacted me or my office concerning the applicability of the Connecticut wage law to the AIG bonuses. If the Fed had called, we would have given the green light for litigation blocking these unconscionable bonuses."

Also yesterday, The Wall Street Journal reported on its Web site that a top candidate to run the government's bailout program, hedge-fund manager Frank Brosens, had withdrawn from consideration.

The newspaper said that Geithner was considering several other candidates for the job, including Herbert Allison, who was installed by government regulators last fall to run mortgage company Fannie Mae. Treasury officials declined to comment on the Journal story. The job of managing the $700 billion bailout program is currently being performed by Bush holdover Neel Kashkari.

At the House hearing, there were a few pointed exchanges.

Rep. Paul Kanjorski, D-Pa., warned Geithner about any requests by the Obama administration for more taxpayer money to support financial bailouts.

"I assume that you recognize there's not an awful lot of sympathy up here to necessarily provide additional funds -- not going on the merits of whether the funds are necessary," Kanjorski said.

"We recognize it will be extraordinarily difficult," Geithner acknowledged.

Rep. Brad Sherman, D-Calif., told Geithner: "What I fear here is that we are doing a kabuki theater in three acts.

"The first act: Washington tells the American people, ‘We understand your anger at Wall Street.' In the second act, we nitpick to death any proposal that actually adversely affects Wall Street. And then, in the third act, we bestow another trillion dollars on Wall Street under extremely favorable terms."