Treasury Secretary Geithner [Wednesday] outlined legislation that would give his department the authority to take over nonbank institutions such as American International Group. Geithner said his department would send bill language to Congress this week that would apply to bank- and thrift-holding companies as well as holding companies that control broker-dealers, insurance companies and futures commission merchants. The measure is designed to give the federal government the power to take over nonbanks such as AIG, whose $182 billion in assistance has triggered bailout fatigue among many lawmakers. "It's very important to emphasize that alongside this financial recovery program, we need to begin the process ... of putting in place reforms to help ensure that this country is never again confronted with the untenable choice between catastrophic financial risk and massive taxpayer bailouts," Geithner said in a speech at the Council of Foreign Relations in New York.
Under the plan, Treasury and the FDIC would decide whether to take
over a firm in consultation with the Federal Reserve Board. The
Treasury would have to first determine whether the firm is in danger of
collapsing, whether its failure would have "serious adverse effects" on
the economy, and whether taking emergency action would mitigate
problems. Receivership would be modeled after the approach the FDIC has
for taking over troubled banks. Geithner did not specify how the system
would be funded, but he suggested that it could come from a mandatory
appropriation to the FDIC out of Treasury's budget or by fee
assessments from firms covered by the measure, which could trigger some
Geithner is scheduled to testify before the House Financial Services Committee Thursday to outline another administration plan that would create a top regulator to oversee risk throughout the financial services spectrum. He said the proposal would place stronger capital requirements on large firms so their failure could not threaten the economy. That was the case in Lehman Brothers, whose failure roiled the credit market and forced policymakers to bail out AIG. "We're going to propose substantial changes to the basic prudential requirements, those that affect capital, liquidity, reserves, so that once we get through this crisis, the large institutions that pose systemic risk to the system in the future have much greater cushions against future stress and shocks," Geithner said. He added that Treasury will soon outline other proposals for better consumer and investor protection.
Consumer activists are hopeful the Obama administration will embrace legislation that would create a Financial Product Safety Commission to regulate the use of items such as home mortgages and credit cards, a brainchild of Harvard University law professor Elizabeth Warren. Rep. Brad Miller, D-N.C., noted that Obama specifically mentioned Warren's work recently at a town hall meeting in California, where he also underscored the need for better consumer protection. "This is not just a message bill," Miller said. "The anger and outrage is now part of the political landscape."