Geithner seeks new takeover powers

Treasury Secretary Timothy F. Geithner pressed a congressional panel Tuesday for sweeping new powers to take over financial firms, while he fended off sharp criticism for allowing executive bonuses at bailed-out insurance giant American International Group.

“In addition to the problems with executive compensation, this financial crisis has revealed very problematic gaps in the regulatory structure governing our financial markets,” Mr. Geithner told the House Financial Services Committee.

Mr. Geithner and Federal Reserve Chairman Ben S. Bernanke, who also testified, sought to use the frustration over AIG’s $165 million in executive bonuses to support their long-standing request for new powers to seize control of financial firms, confiscate bad assets and sell good assets.

The government currently has the power only to seize banks and savings and loans that are failing, using authorities granted to the Federal Deposit Insurance Corp. The FDIC has closed dozens of banks and thrifts in the past year. The cost of taking over those institutions, protecting their depositors and disposing of their assets in an orderly way is covered by insurance fees paid by the banks.

Mr. Geithner proposed establishing similar procedures to enable the Treasury, Fed and FDIC to shutter financial firms that are not banks.

President Obama told reporters at the White House that he hopes “it doesn’t take too long to convince Congress” to approve the new authority, including broader oversight of previously unregulated markets such as the credit default swaps offered by AIG.

The proposal received a warm welcome from Financial Services Committee Chairman Barney Frank, Massachusetts Democrat.

“When non-bank 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,” he said.

Financial experts generally agree that the federal government needs the power to take over failing financial giants, although they debate whether the authority should go to the Fed or the Treasury. Mr. Geithner wants Treasury to have the say-so to seize companies, in consultation with the Fed.

“We advocate the creation of specific bankruptcy procedures to deal with such cases,” said Thomas Cooley, professor at New York University’s Stern School of Business, noting that current bankruptcy procedures “cannot deal with the failure of large and complex financial institutions because financial crises unfold too quickly.”

Republicans in Congress questioned giving the new powers to Mr. Geithner. House Minority Leader John A. Boehner called the proposal “an unprecedented grab of power.”

“There ought to be a real debate about whether we give that authority to the Treasury secretary,” the Ohio Republican told reporters. “Look at insurance operations, for an example, that are regulated by the states. What interest would the Treasury secretary have here, and why would he want this power? There are a lot of unanswered questions.”

Mr. Geithner and Mr. Bernanke said the added regulatory muscle would help reduce damage failing firms inflict on the financial system and national economy.

“As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can,” Mr. Geithner said.

While AIG’s extensive insurance businesses are regulated by the states, the dangerous speculative trading in credit default swaps that nearly brought AIG down last fall occurred in a subsidiary not overseen by either state or federal regulators.

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