WASHINGTON — Treasury Secretary Timothy Geithner asked Congress on Tuesday for broad new powers to regulate non-bank financial companies, such as troubled insurer American International Group, whose collapse could jeopardize the economy.
"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."
At the same time, Federal Reserve Chairman Ben Bernanke revealed that he had considered suing to keep AIG from paying millions in executive bonuses but that his legal advisers counseled him against it.
Geithner acknowledged that the current climate of anger, including the furor over those retention bonuses, will complicate any effort by the Obama administration to get more bailout money from Congress. "We recognize it will be extraordinarily difficult," he said.
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The administration sought to use that rancor to build support for its financial overhaul proposals.
Geithner joined Bernanke in calling for greater governmental authority over complicated and troubled financial companies — power they likened to the authority wielded over banks by the Federal Deposit Insurance Corp. That includes the power to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.
AIG is a globally interconnected colossus, with 74 million customers worldwide and operations in more than 130 countries. The government decided it was simply too big to let fail.
"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.
Geithner, Bernanke and New York Fed President William C. Dudley testified in a rare joint appearance before the panel. Their testimony came a day after the Fed unveiled a new bank rescue plan under which the government would take responsibility for up to $1 trillion in sour mortgage securities with the help of private investors.
Much of Tuesday's discussion centered on ways to help the government better deal with future AIG-like companies.
"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," Geith-ner said. "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."
Geithner made it clear he thinks the treasury secretary 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 FDIC, which is an independent regulatory agency.
The witnesses were asked whether AIG would have been treated any differently, including the payment of $165 million in bonuses this month, if such powers had existed last September, when the Fed began the government bailout of the insurer.
"Quite differently. It could have been taken into receivership or conservatorship. ... The bonus issue would not have arisen," Bernanke said.
He said that contracts providing for the bonuses could have been adjusted and "we could have taken haircuts" against some of AIG's financial obligations to other companies.