The Treasury is expected to ask for new powers to seize troubled financial institutions that aren't banks. And when the White House Press Secretary says that this request "isn't anything crazy," it makes me fear that something crazy is about to happen. We'll see. For now, here's the important part from the Washington Post write up:
Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.
A lot of how this works will depend on details that haven't really been made clear. For instance, the Post says that the Treasury will be able to act only after consulting with the president and "getting a recommendation from two-thirds of the Federal Reserve Board." But the membership of the Federal Reserve Board isn't a multiple of three, so this makes it sound like the administration is pursuing either an imaginary number or a kangaroo court. I'm sure this will be fleshed out.
More broadly, though, I'm hearing two arguments from the administration that don't seem easy to reconcile. The first explanation is the need protect the economy from systematic collapse. Tim Geithner said last night that "it's a necessary thing for any government to have a broader range of tools for dealing with these kinds of things, so you can protect the economy from the kind of risks posed by institutions that get to the point where they're systemic."
And the second explanation is the need to prevent non-bank institutions from giving out large bonuses after they veer toward collapse and require government aid. Press Secretary Robert Gibbs said this morning that "This is exactly what the Treasury Department needs to deal with things like A.I.G." He went on: "If the Treasury had resolution authority on A.I.G. you wouldn't have to put it into bankruptcy to change executive compensation, you could do that automatically."
It's possible that both arguments have merit. But the two arguments also seem logically distinct.
The arguments in favor of compensation restrictions are usually based on fairness -- ie, it's unfair for taxpayers to keep AIG afloat and pay large bonuses to its executives, when the executives would not have gotten those bonuses had the company just flat-out failed.
But no one really makes the claim that retroactive compensation restrictions are beneficial for the economy as a whole. Indeed, if you believe this morning's Wall Street Journal, the compensation restrictions imposed on AIG are making private investors jittery about participating in the administration's public-private investment fund. Presumably, that would be bad for the economy as a whole. And, in response, the administration is scaling back some of its corporate criticism.
But if that's so, why is the administration asking for new powers to make restricting compensation easier in the future?
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