Geithner and Bernanke say the government did not have means to deal with AIG, and more regulatory power could help prevent a similar incident in future.
WASHINGTON (CNNMoney.com) -- The officials managing the bailout of AIG, venting their own frustration about huge bonuses paid to company executives, told Congress Tuesday the government had no choice but to effectively seize control of the troubled insurer last September.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner called on Congress to reorder how companies such as AIG are regulated to prevent a similar collapse in the future.
"AIG highlights broad failures of our financial system," Geithner said. "Compensation practices encouraged risk-taking and rewarded short-term profits. ... The U.S. government does not have the legal means today to manage the orderly restructuring of a large, complex, non-bank financial institution."
Geithner, Bernanke and New York Fed President William Dudley appeared at a House Financial Services Committee hearing on the government's rescue of AIG (AIG, Fortune 500).
The officials, entertaining an onslaught of questions from angry lawmakers, called on Congress to grant regulators so-called resolution authority. That would give the government power to reorganize or wind down a non-bank company. Such powers would include selling off assets and subsidiaries, imposing limits on executive compensation and taking action on risky holdings.
They said that the government could have been better equipped to stem AIG's risky business practices before its failure threatened to bring down the financial system.
"If a federal agency had such tools on Sept. 16, that outcome would have been far preferable to the situation we find ourselves in now," Bernanke said.
Committee Chairman Barney Frank, D-Mass., agreed, arguing that the government regulates banks well but has very little regulation of non-bank financial institutions like insurance companies.
"When non-bank major financial institutions need to be put out of their misery, we need to give somebody the authority to do what the FDIC can do with banks," said Frank. "It is giving somebody a form of the bankruptcy power given under the Constitution. It allows us to avoid the choice of all or nothing -- nothing in the case of Lehman Brothers, all in the case AIG -- equally unacceptable alternatives."
Geithner will again appear before the committee on Thursday to further discuss the administration's proposals for regulatory reform.
Bernanke and Geithner also faced tough questions about the hundreds of millions of dollars of bonuses that went out to executives at AIG's financial products division. In testimony before the committee last week, AIG Chief Executive Edward Liddy said that Bernanke knew about the bonuses for at least three months and Geithner knew of them since the first week of March.
Bernanke acknowledged that he became concerned about AIG's bonuses "last fall," and asked that they be stopped.
Geithner initially said he first heard of the controversial bonuses from his staff on March 10. He later qualified that statement, saying he only learned of the "full scope" of the bonuses on March 10.
On Tuesday, Bernanke testified that he wanted to sue AIG to prevent the payment of millions of dollars of retention bonuses to executives from the division that brought the firm to its knees.
But Bernanke said that he was advised against filing a lawsuit, because the government would have needed to pay "substantial punitive damages" if the Fed lost the case, essentially awarding extra benefits to the executives from the troubled financial products division.
"My reaction upon becoming aware of these specific payments was that ... it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG's collapse," Bernanke said. "[But] legal action could have [had] the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees."Link: http://money.cnn.com/2009/03/24/news/economy/geithner_bernanke_hearing/index.htm?postversion=2009032411
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