Tables Turned On AIG Hearing

 

Thursday, Mar 26,2009, 1:59:06 PM   Click:

Copyright 2009 Los Angeles TimesAll Rights Reserved Los Angeles Times

25 March 2009 Wednesday Home Edition

SECTION: BUSINESS, Business Desk, Part B, Pg 1

LENGTH: 1084 words


TITLE: FINANCIAL CRISIS; Tables turned AIG hearing; regulators answer tough questions about bonuses, but also seize the opportunity to make a case for wider powers.

Signature: Jim Puzzanghera

DATELINE: WASHINGTON AND JIM PUZZANGHERA



At the hearing of the Congress that aims to bring the nation top economic decision makers in the spotlight on the premiums paid to employees of American International Group Inc. turned in rather an overview of the Obama administration seeks to reorganize the regulatory powers Federal.

Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke, Congress said Tuesday that the government needed new broad powers to seize and dismantle the major financial institutions that could seriously harm the economy as a whole, should they collapse.

"AIG is largely the failure of our financial system," said Geithner. "Our regulatory system was not equipped to prevent accumulation of unsafe levels of risk."

The call for greater authority, that President Obama raised last week, would be a major expansion of government authority in the economy, echoing across the authority granted to Washington during the Great Depression .

Geithner said such a power would be part of a new financial regulatory framework that outlines Thursday and could include stricter limits on executive compensation.

The Federal Deposit Insurance Corp., created in 1933, has the ability to capture and banks not to sell their assets, as it did last summer with the IndyMac Bank in Pasadena. But the government has no authority or mechanism to enter other types of financial institutions, such as the giant insurer AIG, which is why the Fed has stepped in last September with an unprecedented number of 85 billion loan to keep the company default.

The Fed and Treasury have since extended to AIG bailout commitments to $ 182.5 billion and a share of responsibility for supervision of the government 80% shares in the company.

"If a federal agency that has had such tools on September 16, they could have been used to AIG conservatorship or receivership, unwind slowly, to protect policyholders and to impose on haircut creditors and counterparties as appropriate, "Bernanke told members of the House Financial Services Committee. "This result would have been far preferable to the situation we find ourselves now."

Bernanke and Geithner, under fire for not stopping 165 million in bonuses to employees of the unit of AIG that led to the collapse of the company, tried to take the initiative during a hearing to probe the controversial payments.

They replied to questions on premiums - Bernanke said he wanted to sue to stop - then used the company in New York in Appendix A of the need to expand government authority to prevent a mess in the future.

Bernanke said the new authority could be given to the FDIC. Geithner suggested that it might be paid to the Treasury Department, in conjunction with the Federal Reserve and the White House.

The new authority would likely be associated in some way with a new regulatory initiative, the administration has considered in recent weeks - a government entity to control the economy to systemic risks that regulators do can not identify. Regulators oversee only portions of the financial system.

On Monday, the Treasury Department and the Fed released a joint statement calling for the Fed to play "a central role" in conjunction with other agencies in preventing and managing financial crises.

Bernanke said that "strong, effective supervision of all firms of systemic importance" could avoid a repeat of the situation of AIG.

Obama said he hoped not to take too long to convince the Congress of the need for new powers to deal with large companies on the verge of rupture.

"Keep in mind that it is precisely because of the absence of such authority that the AIG situation has worsened," Obama said Tuesday during a press conference on television. "If it was a bank and he actually collapsed, the FDIC could step ... And in a structured way to renegotiate the contracts, get rid of bad assets, strengthen capital requirements, to sell on the private market. "

The chairman of the House, Rep. Barney Frank (D-Mass.), approved the idea.

"When non-bank, large financial institutions need to be put out of their misery, we must give someone the power to do what the FDIC can do with the banks," he said, promising to work with the Administration to develop legislation. House Speaker Nancy Pelosi (D-San Francisco) and Majority Leader of the Senate Harry Reid (D-Nev.) gave their support.

In recent weeks, other lawmakers, like Senator Bob Corker (R-Tenn.), have expressed surprise and concern that federal officials have no power of evil to enter the large companies such as AIG or General Motors Corp., which represent a serious risk to the economy, so they can be restructured or dismantled in an orderly fashion.

But some Republicans are not ready Tuesday to give the new authority. House Minority Leader John A. Boehner (R-Ohio) called "an unprecedented grab of power."

Geithner and Bernanke defended their handling of AIG bonuses. Bernanke said that he had sought to file a complaint to avoid the payments, but declined after learning that he could wind up doubling the premiums if the staff asked for punitive damages.

"A lawsuit could have the perverse effect of doubling or tripling the financial benefits to the [AIG] employees," said Bernanke.

Geithner acknowledged there have been reports on AIG retention bonuses earlier this year. But he said he was "not aware of details of payments or legal nature" until March 10. Geithner tried to get Edward Liddy AIG Executive Director to determine the premiums, but allows them to be paid by March 15 after being informed of the company had contracted with employees early last year to pay the premiums.

Geithner also said the staff of the Treasury intervened with Senator Christopher J. Dodd (D-Conn.) when Bill stimulus was confirmed in place last month and "expressed concern" that the executive could be "vulnerable" because of legal problems she applies retroactively to premiums. The provision was amended to exempt payments made before February 11.


Dodd said he has changed the provision at the request of the Obama administration.

Geithner said the Treasury and the Ministries of Justice were looking for ways to recover the premiums for employees. Geithner, but the premium linked to the question of the need to expand the restrictions on executive compensation.

"The issue of executive compensation beyond AIG and demands a reform of the system of incentives and compensation in the financial sector," he said.

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jim.puzzanghera @ latimes.com

GRAPHIC: PHOTO: talking points: Treasury Secretary Timothy Geithner, left, Fed chairman Ben Bernanke and New York Fed chief William Dudley to the House hearing. Regulators have no tools to deal with AIG, "said Bernanke. PHOTOGRAPHER: Associated Press Evan Vucci PHOTO: CENTRAL FOCUS: American International Group of New York has taken heat from his immense and the government bailout of $ 165 million in bonuses it awarded to employees. PHOTOGRAPHER: Bloomberg News Gino Domenico PHOTO: FOCUS MEDIA: Treasury Secretary Timothy Geithner, left, is among those who appear before the House Financial Services Committee. He linked the issue of AIG bonuses to the need to expand the restrictions on executive compensation. PHOTOGRAPHER: Monsiváis Pablo Martinez Associated Press

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