Obama asked for permission to Unwind AIG-like Institutions

WASHINGTON, Mar 25, 2009 (A. M. Best via COMTEX) -- AIG | Quote | Chart | News | PowerRating -- The collapse of American International Group demonstrates the federal government needs the authority to take over failing insurance companies and other non-bank institutions to avoid systemic risk to the entire economy, President Barack Obama said in a nationally televised press conference.

The president's comments echoed similar sentiments offered to Congress by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner during oversight hearings of the $182.5 billion rescue plan for AIG.

"We've got a regular mechanism whereby we deal with FDIC- insured banks. We don't have that same capacity with an institution like AIG. And that's part of the reason why it has proved so problematic," Obama said. "We should have obtained it much earlier so that any institution that poses a systemic risk that could bring down the financial system we can handle and we can do it in an orderly fashion that quarantines it from other institutions."

The comments come as Obama finalizes details on a plan to create a systemic risk regulator with authority to monitor, and intervene when necessary, to prevent or control risk contagion across the broad financial spectrum. In a joint statement, Treasury and the Fed said they were working with Congress "to develop a regime that will allow the U.S. government to address effectively at an early stage the potential failure of any systemically critical financial institution."

"I think that there's going to be strong support from the American people and from Congress to provide that authority, so that we don't find ourselves in a situation where we've got to choose between either allowing an enormous institution like AIG -- which is not just insuring other banks, but is also insuring pension funds and potentially putting people's 401(k)s at risk if it goes under -- that's one choice, and then the other choice is just to allow them to take taxpayer money without the kind of conditions that we'd like to see on it," Obama said.

Geithner is expected to provide at least a broad outline of the administration's plan March 26, when he returns to the House Financial Services Committee to testify on the need for comprehensive regulatory reform for the financial system. Last month, Geithner told members of the Senate Banking Committee that "an important part of (regulatory reform) will be to re-examine the overall supervisory structure around insurance companies," though the administration has not offered specific support for the optional federal charter proposals favored by some quarters of the industry.

Meanwhile, in the Senate, the first concrete legislative plan calling for a federal systemic risk regulator has been introduced by Sen. Susan Collins, R-Maine, a key "swing vote" Republican who once served as head of the state agency responsible for regulation of insurance in Maine.

Under Collins' Financial System Stabilization and Reform Act, an independent Financial Stability Council composed of representatives from existing federal financial regulators would be granted responsibility to oversee portions of the financial system. According to Collins, the FSC would have authority to close regulatory "black holes" for financial products or activities that fall outside existing regulatory authority, and promulgate rules ensuring financial institutions do not grow "too big to fail."

"America's consumers, workers, savers, and investors deserve the protection of a new regulatory system that modernizes regulatory agencies, sets safety and soundness requirements for financial institutions to prevent excessive risk-taking, and improves oversight, accountability, and transparency," Collins said.

One key figure in crafting details of the plan going forward could be former Hartford Financial Services Chief Operating Officer Neil Wolin, just nominated by Obama to serve as Geithner's deputy Treasury secretary. Named in January as White House counsel for economic policy and as a deputy assistant to Obama, Wolin served at the head of the Hartford, Conn.-based financial multiline insurer and financial services provider's property/casualty division since June 2007. In 2001, he joined the company as its executive vice president and general counsel.