By DPA,
Washington : US authorities need broad new emergency powers to take over financial firms whose collapse could threaten the wider economy, the country’s top economic officials warned Tuesday in the wake of the controversial bail-out of insurance giant American International Group Inc (AIG).
Facing a groundswell of public anger over Wall Street and AIG’s role in the financial crisis, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke defended their rescue of AIG before lawmakers as critical to the stability of the US economy.
But the administration argued that many of the controversies over the bail-out could have been avoided if government had the power to take full control of AIG back in September, rather than merely loaning them emergency funds. Currently, the government can only take control of banks.
“Right now we do not have resolution authority for a non-bank institution like AIG that is comparable to what we have for banks that get into trouble,” Obama said after a meeting with Australian Prime Minister Kevin Rudd.
New regulation was being worked on in Congress, Obama said, which would allow the government to engineer an “orderly” dismantling of a critical firm like AIG, which has its tentacles in broad swathes of the US financial industry.
Bernanke warned that the failure of AIG, which effectively insures the troubled mortgage holdings of US banks, would have led to a “1930s style global financial and economic meltdown”.
“AIG highlights the urgent need for new resolution procedures for systematically important non-bank financial firms,” Bernanke told the Financial Services Committee of the House of Representatives.
But opposition Republicans in Congress lambasted the new proposal as an effort to give the executive too much control over companies.
“This is an unprecedented grab of power,” said John Boehner, leader of the minority Republicans in the House of Representatives.
The rescue of AIG, now totalling nearly $180 billion, has provoked tremendous public outrage in the US after it emerged last week that the company paid out $165 million in retention bonuses to executives.
Lawmakers noted that the bonus scandal had made Congress even more sceptical of providing extra cash to keep the financial system afloat. Obama has suggested he may need funds beyond a $700 billion rescue plan adopted in October.
“There’s not a lot of sympathy up here to provide additional funds,” warned Democratic congressman Paul Kanjorski.
New York Attorney General Andrew Cuomo said late Monday that 15 of AIG’s top 20 bonus recipients have agreed to return the money, totalling about $50 million.
Geithner, who has faced some calls to resign over the AIG scandal, repeated his opposition to the payments and said the contracts awarding those bonuses could have been renegotiated if the government had been able to take broader control of AIG back in September.
“The lack of an appropriate regulatory regime and resolution authority for large non-bank financial institutions contributed to this crisis and will continue to constrain our capacity to address future crises,” said Geithner, who plans to unveil a broader overhaul of financial regulation on Thursday.
AIG has been exposed to hundreds of billions of dollars in losses as the primary insurer for banks holding subprime mortgages, which have plummeted in value since the US housing bubble began collapsing in late 2006.