Fed, Treasury chiefs face questions on the bank rescue

 

Tuesday, Mar 24,2009, 11:47:58 PM   Click:

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WASHINGTON_The Federal Reserve Chairman and Treasury Secretary rare joint appearance at a hearing Tuesday in Congress, where legislators are expected to put pressure on the new risks for the taxpayers of their last effort to save faltering banks.

Fed Chief Ben Bernanke and Treasury Secretary Timothy Geithner are also likely to make a reprimand on the treatment of bonuses to executives of AIG, the giant insurance company that became the symbol of reckless risk-taking Wall Street.

But after venting their anger once again at a hearing, the House Tuesday, lawmakers are expected to question Geithner and Bernanke on the plan announced the previous day to take charge of up to $ 1 trillion in bad mortgage securities with private investors in order to unclog the nation's credit system.

At the same time, Bernanke and Geithner are likely to call again on Congress to enact legislation that would allow the government to safely dismantle a large financial institution such as American International Group Inc, in order to minimize Damage caused to the U.S. financial system and overall economy.

President last week, Barack Obama said his administration will soon propose new oversight of the financial sector, which includes a "resolution power" with powers similar to those of the Federal Insurance Corp. Depoist, which can take control of non-banks, the management of their bad assets and sell the right of competitors.

The proposal would give the Treasury secretary the unprecedented power, after consultation with officials from the Fed, the U.S. central bank to take control of a major financial institution and run it. The head of the Treasury is an officer of the hotel, unlike the FDIC, an independent regulatory agency that supports bank deposits.

At Tuesday's hearing Geithner "will emphasize the need for the government to address the businesses and markets that pose systemic risks to our financial system, ensuring that we have to fill gaps in the regulatory framework and that we never have to deal with situations like AIG again, "spokesman for the Treasury said Andrew Williams.

Toxic plan assets is a crucial element of the Obama administration's strategy to support banks and stabilize the financial system. If the bad assets of banks are taken off the books, they will be better able to give more freedom to customers.

According to details released Monday, the plan takes $ 75 billion to $ 100 billion from the government's current $ 700 billion financial bailout pot. The government together with private investment, primarily institutional investors such as hedge funds, and loans from the FDIC and the Fed to $ 500 billion of purchasing power.

Geithner said purchases could eventually rise by $ 1 trillion _ roughly half the $ 2 trillion of toxic assets on bank books now.

The rescue plan was a huge gambit, which came as a tonic for Wall Street, which has a balance earlier overview of the program by Geithner missing details.

Stocks have soared, the Dow Jones Industrial Average shot nearly 500 points, or 6.8 percent, with bank assets of the plan and a report showing an unexpected jump in home sales.

Obama said Monday his economic team was "very confident" the rescue plan work.

The goal, Obama said, is to get banks to loan, so "families can obtain consumer loans, auto loans, student loans, (and therefore) that small businesses are able to finance themselves, and we can begin to get this economy back in motion. "

Geithner counseling patience Monday, saying the rehabilitation of the banking and financial industry must move forward despite its "deep outrage and anger" on bad lending practices and investments.

The announcement came Monday before a summit next week in London and 20 major developing economies struggling with the global recession.

Obama tries to get other rich countries to do more to stimulate their economies in government spending, that the U.S. has done. However, some, especially in Europe, opposed to calls for more funding and stimulating preference for more coordinated international banking regulations.

The flesh a plan announced by Geithner is designed to help a damaged toxic mortgages and other securities.

If the value of the securities increases, private investors and taxpayers in respect of gains. If values decline, the government and private investors would suffer losses.

"This will help banks clean up their balance sheets and make it easier for them to raise capital," said Geithner.

Obama, in the middle of the hall cabinet by the leaders of his economic team, has downplayed expectations of a speedy solution.

"The good news is that we still have a vital part of our recovery," said Obama. "But we still had a long way to go."

At the same time, Obama said the economy begins to show "glimmers of hope" in the housing market, where the housing bubble burst last year, set in motion the financial crisis that brought the system near collapse.

On Monday, the bank praised the officials, the outlines of the program and expressed optimism that it will work.

"We are very favorable," said Scott Talbott, Senior Vice President of Public Affairs, the Financial Services Roundtable. "We think it is a useful tool in the arsenal against liquidity problems."

Treasury officials had no estimates on when the government would start doing the good that asset purchases are market expectations that the process could begin in the coming weeks.

Geithner defended the decision that the government is so much risk. He said the alternative would have been to do nothing and the risk of a prolonged recession, or have the government bear all the risks.

Geithner wrote Monday in the Wall Street Journal that the new Bank program to "solve the crisis as quickly and as efficiently as possible at the least cost to the taxpayer. ... You just hope for the banks to these assets more time may prolong the crisis. "

The Treasury Secretary has personally committed to the success of the new program. Geithner's performance in the Cabinet, including its slowness in learning multi-million dollar executive bonuses paid by AIG after taking money from rescue was severely criticized by some in Congress.

AIG recently the decision to pay millions in bonuses has created a puzzle of public relations for Obama, when he tries to build a political and public support for his ambitious budget bank rescue plan and the revision of nation regulatory structure to prevent future financial crises like the one now gripping the country.

AIG is a colossus interconnected globally, with 74 million customers worldwide and in over 130 countries. The government has decided that it was simply too big to let fail.

Accordingly, the government has fired four times out AIG to the tune of over $ 180 billion. The company recently paid at least $ 165 million in bonuses to employees who worked in the division of financial products that were responsible for the insurance company nearly collapse last year. Premiums have even AIG reported a stunning $ 62 billion loss, the largest United States in history.

On Monday, New York Attorney General Andrew Cuomo said that AIG employees have voluntarily agreed to returnabout $ 50 million of the $ 165 million in bonuses awarded earlier this month by the insurer in trouble.

Government to rescue AIG, Citigroup Inc, Bank of America Corp. and others have put billions of taxpayer dollars at risk in the past year, and the anger of the American public.

But Bernanke said last week that failure of a large, interconnected world, the company would have had potentially devastating effects on the financial system. "I do not think we had a realistic alternative to prevent these failures," he said.