UPDATE:US Treasury, Fed Stress Need To Be Able To Wind Down Non-Bks
March 24 2009 - 11:59AM
Dow Jones News
The U.S. government needs to be able to take over and wind down
a broad range of economically important non-bank financial
institutions, top economic officials told Congress Tuesday, though
who will get that authority was left as an open question.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary
Timothy Geithner told U.S. House lawmakers the government's
experience with American International Group Inc. (AIG) highlights
the need to deal with increasingly complex and systemically
important institutions.
"If a federal agency had had such tools on Sept. 16, they could
have been used to put AIG into conservatorship or receivership,
unwind it slowly, protect policyholders, and impose haircuts on
creditors and counterparties as appropriate," Bernanke told the
House Financial Services Committee.
Both he and Geithner said such a program could be modeled on the
way the Federal Deposit Insurance Corp. takes over and deals with
the assets and liabilities of U.S. banks. Bernanke even suggested
the FDIC could be the logical agency to wield that authority.
That marks a split with Geithner, who said such authority should
rest with the Treasury. Geithner said the Obama administration
wants the government to be able to act as conservator for large
financial firms teetering on the brink of collapse, authority that
would allow policymakers to renegotiate or cancel existing
contracts, and sell or transfer a firm's assets or liabilities.
"This proposed legislation would fill a significant void in the
current financial services regulatory structure with respect to
non-bank financial institutions," Geithner said.
Rep. Mel Watt, D-N.C., questioned whether it would be
appropriate for such power to reside at Treasury, which is run by
political appointees.
"I guess the concern I would raise is about the prospect of
either making that a political appointee who has that substantial
authority, making it someone who is not affirmatively been given
the responsibility as a systemic regulator," Watt said at the
hearing.
Treasury is looking to expand its oversight portfolio at a time
when the White House and Congress are considering a major overhaul
of the U.S. regulatory system. In addition to giving some agency
resolution authority, policymakers have also said they want to give
one regulatory body the ability to monitor risks to the financial
system as a whole.
Bernanke, whose Federal Reserve has been frequently named as the
potential "systemic risk regulator," said the authority to deal
with failing non-banks could rest with the FDIC "or some other
body," and any decision by the government to act should involve
consultation with the White House and other regulators. The key he
said, was changing current laws.
"Unfortunately, federal bankruptcy laws do not sufficiently
protect the public's strong interest in ensuring the orderly
resolution of non-depository financial institutions when a failure
would pose substantial systemic risks," Bernanke said.
The creation of any resolution authority would rely on
legislation enacted by Congress, and top lawmakers suggested
Tuesday they agree with the need for broader oversight over
financial companies. House Financial Services Chairman Barney
Frank, D-Mass., praised the way the Federal Deposit Insurance Corp.
has been able to effectively deal with collapsing banks and
suggested that agency should be a model for creating a system for
dealing with large companies.
"We need to give somebody, somewhere in the federal government
the power" to put failing non-banks "out of their misery," Frank
said at the hearing.
The initial legislative steps could be taken as soon as the end
of this month. Democratic staff on the Financial Services panel
advised the committee last week they could take up a bill dealing
with regulation of non-bank financial companies as soon as March
31, when the committee is already scheduled to consider other
legislation.
-By Michael R. Crittenden and Maya Jackson Randall, Dow Jones
Newswires; 202-862-9273; michael.crittenden@dowjones.com