Treasury Secretary Timothy Geithner called on Congress to grant extraordinary powers to take over failing financial institutions as he and Federal Reserve Chairman Ben Bernanke faced a barrage of lawmakers' questions over bonus payments at ailing insurance giant AIG.
"The United States government does not have the legal means today to manage the orderly restructuring of a large, complex nonbank financial institution that poses a threat to the stability of our financial system," Geithner told the House Financial Services Committee.
'We Need To Strike The Right Balance'
The authority Geithner seeks would allow the government to take control of a firm and sell or transfer parts of the company to reduce its exposure to risky investments. The secretary would have the same powers as a chief executive officer, with the additional ability to "renegotiate or repudiate" a company's contracts, including those with its employees.
Bernanke echoed the Treasury secretary's request for authority to seize teetering nonbank financial companies — a follow-up to the plan Geithner outlined on Monday to use a government-private partnership to remove up to $1 trillion in tarnished mortgage-backed securities and other toxic assets from banks' balance sheets to spur lending.
But public outrage over hefty bonus payments to executives of American International Group as taxpayers shell out $180 billion to bail out the company means that Geithner in particular got an earful from lawmakers at the congressional hearing.
Geithner said he shared the "anger and frustration" of the American people over the AIG bonuses as well as the corporate practices that led to its near-collapse and triggered the government's decision to extend its initial $85 billion "revolving credit facility" to the company.
"We must ensure that our country never faces this situation again," Geithner told lawmakers. "To achieve that goal, the administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision.
"We need to strike the right balance between encouraging investment and prudent risk-taking to get our financial system moving again," he said.
AIG, Lehman Strategies Compared
Bernanke said it was "highly inappropriate to pay substantial bonuses" to AIG employees. He said he had asked that the payments be stopped but was told that they were mandated by contracts agreed to before the government seized control of AIG on Sept. 16. Even so, the Fed chairman defended the need to keep the company afloat. The global insurance behemoth has 74 million customers worldwide 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.
The committee chairman, Rep. Barney Frank (D-MA), opened the hearing by comparing the government's bailout of AIG with its decision to let financial services firm Lehman Brothers Holdings fail.
"I believe we have two very important negative examples before us of how not to proceed," Frank said. "Neither one is what we should be doing going forward."
Republican Rep. Scott Garrett of New Jersey said the American public wanted a "straight answer on the handling of the AIG bonus fiasco."
"There's also been some question as to the extent of the Treasury Department's involvement in altering provisions in the so-called stimulus package, ensuring that the bonuses would, in fact, be honored," Garrett said.
Although Geithner has said he did not learn of the bonuses until a few days before they were made public, The Wall Street Journal has reported that the Treasury Department worked closely with AIG on compensation issues since the bailout of the company began.
Public Anger Still Simmers
President Obama said Tuesday that he hoped it would not take long to convince Congress to approve the new authority requested by the Treasury secretary.
But the administration's financial rescue plans have slammed up against public anger over the AIG bonuses last week. A key element of the White House plan is to prop up companies, such as AIG, that are considered "too big to fail."
The bonus debacle has prompted calls on Capitol Hill for Geithner's resignation from those who criticize him for failing to head off the politically sensitive bonuses. But Wall Street gave an overwhelming vote of confidence to the secretary's so-called Public-Private Investment Program for Legacy Assets unveiled Monday, with the Dow Jones industrial average rallying to a nearly 7 percent increase, one of its biggest-ever advances.
Meanwhile, New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from AIG have agreed to return them in full, totaling more than $50 million.
Government bailouts of AIG, Citigroup, Bank of America and others have put billions of taxpayers' dollars at risk over the past year and angered the American public.
From NPR staff and wire services.