The New York Times.
Citing A.I.G., Geithner Seeks Wider Power for Takeovers
Treasury Secretary Timothy F. Geithner and Ben S. Bernanke, the chairman of the Federal Reserve, on Capitol Hill on Tuesday.
WASHINGTON — The crisis surrounding the American International Group was a near-tragedy that underlines the need for broad new government authority to regulate or even take control of financial institutions other than banks, the government’s top fiscal officials told lawmakers on Tuesday.
Treasury Secretary Timothy F. Geithner said financial crises like those caused by the recklessness of A.I.G. “contain a basic and tragic unfairness — that those who were prudent and responsible in their personal and professional judgments are harmed by the actions of those who were less careful and less prudent.”
The Federal Reserve Chairman, Ben S. Bernanke, agreed with Mr. Geithner that Congress should grant the Treasury Department and Federal Reserve new powers. Mr. Bernanke told members of the House Financial Services Committee that if the government had had such authority in September, when the depth of A.I.G.’s troubles became obvious, the company could have been put into receivership or conservatorship and regulators would have been able to “unwind it slowly, protect policyholders” and take other prudent measures.
“That outcome would have been far preferable to the situation we find ourselves in now,” Mr. Bernanke testified.
Moreover, he said, had the government been able to assume control of A.I.G. in that fashion, there never would have been seven-figure bonuses paid to executives, a total of about $165 million over all, even while the company was receiving some $170 billion in government backing.
Mr. Bernanke said that, legal and contractual considerations notwithstanding, A.I.G. management was told starting last fall of “our deep concern surrounding compensation issues at A.I.G.”
Mr. Geithner said he shared those feelings. “I found these payments deeply troubling,” he told the panel, led by Representative Barney Frank, Democrat of Massachusetts.
Mr. Frank said the different fates of Lehman Brothers and A.I.G. illustrate the need for options beyond the “all or nothing” approach. “One was the Lehman Brothers example, where they were allowed totally to fail and there was no help to any of the creditors,” Mr. Frank said. “The other is the A.I.G. example, where there was help for all of the creditors. Neither one is what we should be doing going forward.”
Mr. Geithner and Mr. Bernanke testified as the issue of the bonuses continues to resonate with the American people as well as politicians, although it is not yet clear whether the collective emotion will abate with the news that the New York State attorney general, Andrew M. Cuomo, had pressured many bonus recipients to return the money.
Mr. Bernanke, an academic who has studied the Great Depression, said that if A.I.G. had been allowed to collapse, the result at best would have been a significant intensification of an already severe financial crisis and a further worsening of global economic conditions.”
“Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs,” he said.
The proposal for broad new regulatory power could help deflect some criticism of the government’s handling of A.I.G., including allowing the company to pay bonuses to executives after receiving government financing as part of the bailout of financial institutions.
Mr. Bernanke said that he had wanted to sue A.I.G. to prevent the bonus payments but was talked out of it by lawyers who warned that if the lawsuit failed, the government might have to pay double or triple damages in addition to the bonus, since the law in Connecticut, where A.I.G.’s financial services unit has a base, provides for punitive damages if such a suit is unsuccessful.
Ideally, Mr. Bernanke said, he would like to see a business ethic “that links performance and reward appropriately,” and that does not encourage overly risky behavior. “And that was missing in A.I.G.,” he said.
President Obama said on Tuesday he hopes “it doesn’t take too long to convince Congress” to approve the kind of authority Mr. Geithner and Mr. Bernanke were talking about. In remarks after meeting with Prime Minister Kevin Rudd of Australia, the president said ways to stabilize the global financial system will be discussed next week at an economic summit meeting in London.
But Representative John A. Boehner of Ohio, the Republican minority leader, said the new authority would be “an unprecedented grab of power,” Reuters reported. While not saying that he opposed the idea, Mr. Boehner told reporters it should be the subject of “a real debate.”
The resolution authority — to take over non-bank financial institutions that pose a systemic risk until problems are resolved — was intended to be part of the administration’s comprehensive overhaul of the government’s financial regulatory system, which has been delayed as the Treasury dealt with immediate crises.
The government has such authority for banks; the Federal Deposit Insurance Corporation has power to step in to clean up a bank’s books and alter business practices like executive compensation. There is no such federal authority for non-bank entities, like A.I.G., that in recent years have become bigger players in the financial system. Sheila C. Bair, the chairwoman of the F.D.I.C., has said she believed such authority was necessary.
Central to the A.I.G. controversy has been Mr. Geithner’s contention, based on lawyers’ advice, that the administration could not legally override contracts like its bonus system for top employees that the insurance giant had entered into before its government bailout last September. The government now owns almost 80 percent of A.I.G.
Mr. Geithner met last week with Mr. Frank about the proposed legislation. Mr. Frank has scheduled a hearing on Thursday specifically about the resolution authority proposal, and the Treasury secretary is expected to testify.
Mr. Geithner’s emphasis on the subject on Tuesday as well allows him to try to take the initiative and be proactive about why he was not aware sooner about the March 15 bonuses to more than 400 employees at A.I.G.’s Financial Products unit that was responsible for the risky and exotic derivatives that ultimately crippled the company and threatened the global financial system.
Mr. Geithner testified that he first received “a full briefing” on details of the bonuses on March 10 and asked the head of A.I.G., Edward M. Liddy, to renegotiate them. But Mr. Liddy said there might be breach-of-contract issues, Mr. Geithner recalled. (The secretary said Mr. Liddy should not be blamed for the over all mess, since he was brought in to, in effect, clean it up.)
At Thursday’s hearing, Mr. Geithner is expected to focus more explicitly on the administration’s plans for tightened financial regulation.
At a conference Monday evening, Mr. Geithner was asked about the resolution authority idea and suggested that expanded authority would be a “critical” part of working through the financial crisis.
“It is a terrible, tragic thing that this country came into this crisis with such limited tools for trying to protect the economy itself from the kind of distress that would come as the system came back down to earth,” he said.
“The executive branch had very limited authority to do the things all governments have to do in a crisis,” which had been partially addressed by the bailout legislation last year. “Better resolution authority will be a critical complement of that.”