THE OBAMA administration has called on Congress for more powers to regulate and, if necessary, seize control of big, non-bank financial institutions like insurance giant AIG, whose collapse would pose a grave risk to the economy.
In a rare joint appearance before the House Financial Services Committee, US treasury secretary Timothy Geithner and Federal Reserve chairman Ben Bernanke said enhanced federal powers could have prevented AIG paying huge, controversial bonuses to senior employees.
“The US government does not have the legal means today to manage the orderly restructuring of a large, complex, non-bank financial institution that poses a threat to the stability of our financial system,” Mr Geithner said.
“I share the anger and frustration of the American people, not just about the compensation practices at AIG and in other parts of our financial system, but that our system permitted a scale of risk-taking that has caused grave damage to the fortunes of all Americans.”
The Federal Deposit Insurance Corporation (FDIC), a government agency that insures bank deposits, currently has broad authority to seize control of banks, take over their bad assets and sell good ones to competitors. Mr Geithner and Mr Bernanke said the government should have similar powers over non-bank financial institutions like AIG, which federal authorities saved from collapse last September.
“If a federal agency had had such tools on September 16th, 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. That outcome would have been far preferable to the situation we find ourselves in now,” Mr Bernanke said.
“Second, the AIG situation highlights the need for strong, effective consolidated supervision of all systemically important financial firms. AIG built up its concentrated exposure to the subprime mortgage market largely out of the sight of its functional regulators.”
Mr Bernanke said he tried to block AIG’s payment of more than $200 million in retention bonuses to staff after receiving tens of billions of dollars in federal bailout funds. He said that legal advisers warned, however, that a lawsuit aimed at retrieving the bonuses could result in a court ruling that would give the AIG employees bonuses two or three times their original size.
Mr Geithner said that, when he first heard of the bonuses on March 10th, he asked AIG chairman Edward Liddy to renegotiate them.
“He explained that the contracts for the retention payments were legally binding and pointed out the risk that, by breaching the contracts, some employees might have a claim under Connecticut law to double payment of the contracted amounts,” he said.
“Treasury is now working with the Department of Justice to determine what legal avenues may be available to recoup retention bonuses that have already been paid. Treasury will also impose on AIG a contractual commitment to pay the treasury, from the operations of the company, the amount of the retention awards just paid. Finally, treasury will deduct from the $30 billion in recently committed capital assistance an amount equal to the amount of those payments.”
The House of Representatives voted last week to tax at 90 per cent the large bonuses paid to staff in firms that have received federal bailout funds.
President Barack Obama has expressed reservations about the legislation, which could be voted down when it reaches the senate next month.
New York attorney general Andrew Cuomo said this week that half of the AIG bonuses may be retrieved, and nine of the top 10 recipients have agreed to give back their payments.
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