U.S. Plan Seeking Expanded Power in Seizing Firms

25 March , 2009

WASHINGTON — The Obama administration and the Federal Reserve, still smarting from the political furor over the bailout of American International Group, began a full-court press on Tuesday to expand the federal government’s power to seize control of troubled financial institutions deemed too big to fail.n his news conference on Tuesday night, President Obama said the government could have handled the A.I.G. bailout much more effectively if it had had the same power to seize large financial companies as it did to take over failed banks.

“It is precisely because of the lack of this authority that the A.I.G. situation has gotten worse,” Mr. Obama said, predicting that “there is going to be strong support from the American people and from Congress to provide that authority.”

Earlier on Tuesday, the Treasury secretary, Timothy F. Geithner, offered a proposal that would allow the government to take control, restructure and possibly close any kind of financial institution that was in trouble and big enough to destabilize the broader financial system.

The federal government has long had the power to take over and close banks and other deposit-taking institutions whose deposits are insured by the government and subject to detailed regulation.

But the Obama administration and the Fed would extend that authority to insurance companies like A.I.G., investment banks, hedge funds, private equity firms and any other kind of financial institution considered “systemically” important. That would let the government for the first time take control of private equity firms like Carlyle or industrial finance giants like GE Capital should they falter.

The Treasury and the Fed each sent their own proposals to the House Financial Services Committee on Tuesday, and President Obama has asked Congressional leaders to put the legislation on a fast track. House Democrats said they planned to act quickly and hoped to bring a bill to the House floor within the next several weeks.

If Congress approves such a measure, it would represent one of the biggest permanent expansions of federal regulatory power in decades. But scores of questions remained on Tuesday about how the authority would actually work, and industry experts cautioned that it would only be one step in a broad overhaul of financial regulation that President Obama and Congress were beginning to map out.

Mr. Geithner, testifying before the House Financial Services Committee, said the government could have grappled more effectively with A.I.G. — an insurance conglomerate over which neither the Fed nor any other federal bank regulator had much authority — if the Treasury had already had broader authority to “resolve” troubled institutions.“As we have seen with A.I.G., distress at large, interconnected, nondepository financial institutions can pose systemic risks just as the distress at banks can,” Mr. Geithner told lawmakers. “We will do what is necessary to stabilize the financial system, and with the help of Congress, develop the tools that we need to make our economy more resilient.”

Ben S. Bernanke, chairman of the Federal Reserve, said that such powers would have allowed the government to scale back A.I.G.’s contracts to pay outsize bonuses and perhaps negotiate lower payments to the domestic and foreign banks that were among its creditors.

“If a federal agency had had such tools on Sept. 16, they could have been used to put A.I.G. into conservatorship, unwind it slowly, protect policyholders and impose haircuts on creditors and counterparties,” Mr. Bernanke told lawmakers.

But even as they made their case, administration officials left many of the big questions unanswered. Among them: what kinds of companies are “systemically important” and how does that get decided? What should be the government’s ultimate goal — to wind down the troubled company as quickly and smoothly as possible, or to rehabilitate it and return it to health?

Under Mr. Geithner’s plan, the decision-making power would lie primarily with Treasury and the F.D.I.C., though the Treasury would have to consult with the White House and the Fed.

But that idea could clash with plans to create a new, overarching “risk regulator” that would be responsible for monitoring risk across the financial system. Some lawmakers have proposed that the Fed, which is already at the heart of the financial system, should play that role.

Other experts say the F.D.I.C. would be a more logical choice, taking advantage of its experience in taking over smaller banks. Supporters of this approach are concerned that the Fed will be overburdened with its regulatory duties and note that the Fed failed for years to exercise its authority to regulate dangerous mortgage practices.

Jamie Dimon, the chief executive of JPMorgan Chase and an outspoken supporter for creating a systemic risk regulator, said it was hard to expand the government’s authority to seize troubled financial companies without also dealing with the regulatory issues. “You can’t take care of your heart and not your lungs,” he said in a telephone interview on Tuesday. “You need someone to look behind the corners and to say something like, ‘this company is too big or too risky.’ ”

Mr. Dimon said that giving the government this power would have provided a process for dealing with failing institutions like Lehman Brothers, Bear Stearns, Wachovia and A.I.G.

“You don’t want too big to fail,” he said. “You want a resolution process where the process doesn’t damage the whole system.”

Representative Barney Frank, chairman of the House Financial Services Committee, plans to start drafting a bill in the next several days.

Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, said Congress might consider putting the oversight authority in the hands of a task force, rather than consolidating it at the Fed.

Mr. Dodd talked of establishing a council that includes the Fed, the F.D.I.C. and the Office of Comptroller of the Currency to avoid giving too much power to a single agency. “I for one would be sort of intrigued in looking at alternative ideas,” Mr. Dodd said.

On Thursday, Mr. Geithner plans to outline his broader plan for overhauling the financial regulatory system.

On Friday, President Obama plans to meet at the White House with top executives from many of the nation’s largest financial institutions to discuss his financial stabilization effort.

Administration officials have said their regulatory plan will create a broad role for the Fed as the lead risk regulator.

The administration is also expected to propose tighter regulation for derivative financial products, like the credit-default swaps that caused most of A.I.G.’s problems, and to require that such instruments be traded in a more transparent manner on exchanges or through clearinghouses.

Mr. Geithner made it clear on Tuesday that he would be pushing for tighter oversight of executive compensation, in part to make sure that financial incentives did not encourage reckless financial practices.