Obama Wants New Rules For Wall Street Now

March 24, 2009— -- President Obama said today he hopes it "doesn't take too long to convince Congress" to give his administration unprecedented new powers to take over and stabilize ailing nonbank institutions such as bailed-out insurance giant American International Group.

The president sounded as if he were in a hurry to win the expanded authority just hours after Secretary Timothy Geithner outlined the request to Congress.

"We will do what is necessary to stabilize the financial system and, with the help of Congress, develop tools that we need to make our economy more resilient and our financial system more stable and more just," Geithner said.

If AIG had been allowed to fail, Geithner said, the impact on the financial system would have been "catastrophic."

Obama said the new regulatory powers were essential to avoid a fiscal crisis again in the future, arguing that the federal government needed a "more comprehensive view than the one we've been taking so far."

He spoke with reporters in the Oval Office alongside Australian Prime Minister Kevin Rudd. Both men will meet again next week at the Group of 20 meeting of the world's major economies in London for a summit on the global financial crisis.

That crisis was exacerbated by the threatened collapse of AIG.

Geithner told Congress today that it was with "extreme reluctance" that the government authorized $85 billion in credit to AIG -- part of what would eventually become more than $170 million in authorized government aid to the company -- because "we did not have the authority to unwind AIG."

Geithner, along with Federal Reserve Chairman Ben Bernanke and William C. Dudley, the president and chief executive officer of Federal Reserve Bank of New York, testified in hearing on AIG held today by the House Financial Services Committee.

Geithner said that the Obama administration is proposing "resolution authority" that would allow the government to address financial distress at non-bank firms much like the Federal Deposit Insurance Corp. does with banks.

"AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms," Bernanke said today. "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."

"That outcome would have been far preferable to the situation we find ourselves in now," Bernanke added.

The legislation would allow the government to make loans to an institution, buy its assets and renegotiate contracts, including contracts with employees. Both AIG and government officials have said that the contracts with employees of the AIG Financial Products unit -- the AIG unit widely blamed for the company's downfall -- prevented the cancellation of millions of dollars in controversial retention bonuses.

One member of Congress warned Geithner and Bernanke that patience was wearing thin with companies like AIG.

"I assume that you recognize there's not an awful lot of sympathy up here to necessarily provide additional funds -- not going on the merits of whether the funds are necessary," said Rep. Paul Kanjorski, D-Pa. "I, for one, am absolutely convinced that, for orderly process, we need additional funding, and probably will commit the second suicidal act, as we did back in September and October, and vote in favor of that funding. But it's not going to be an easy lift on behalf of the Congress."

Federal Reserve Chairman Ben Bernanke wanted to sue American International Group to stop the bonuses but he said that he ultimately decided against a lawsuit after learning of the costly legal consequences that could ensue -- namely, the "perverse effect of doubling or tripling the financial benefits" to AIG's Financial Products unit.

Geithner, who's been engulfed in a firestorm of criticism over the AIG bonus controversy, said that he shared the "anger and frustration of the American people," not just about the bonuses "but that our system permitted a scale of risk-taking that has caused grave damage to the fortunes of all Americans."

He said that the Treasury would deduct the amount of the AIG bonuses from the government's aid to the insurance giant.

Today's hearing is the House Financial Services Committee's second hearing on the government's $170 billion bailout of AIG.

At the first hearing, held last week, several lawmakers hammered AIG CEO Edward Liddy over the controversial retention bonuses handed out to hundreds of AIG employees.

Many in Congress will be more kind toward Geithner, but he still faces questions about why he did not stop the bonuses.

"After making one mistake after another, after failing to lead and losing the confidence of the nation, Secretary Geithner will arrive on Capitol Hill as the loneliest man in Washington," said Rep. Connie Mack, R-Fla., who is not on the House Financial Services Committee.

"He'd be much better served by announcing his resignation than by trying to defend the indefensible," Mack told ABC News.

Though President Obama has expressed unwavering support for Geithner, some Democrats have voiced concerns in the fallout from the bonus scandal.

"While he exercised extremely poor judgment about the AIG bonuses and must lead the effort to recoup those bonuses, I remain supportive of the secretary for now." said Sen. Mary Landrieu, D-La.

"There is definitely cause for concern about why Geithner waited until the last minute to talk to Liddy about these bonuses. It's his job to know about these things," said another congressional Democrat who asked to remain anonymous.

But the lawmaker still expressed confidence in Geithner.

"We cannot lose sight of the bigger picture here. Geithner inherited a terrible mess from the Bush administration and I am completely confident in his ability to get our nation's economy back on track."

Rep. Michael Capuano, D-Mass., suggested that it's too early to judge Geithner's performance.

Asked by ABC News last week whether he supports Geithner's staying in place, Capuano replied, "At the moment, yeah. I mean, I have questions like anybody else, but let's be serious. He's still new on the job.

"He hasn't been able to get anybody else appointed or actually confirmed by the Senate. So, I think it's a little too early to pass that judgment," Capuano said. "I actually think it would become a distraction to worry about that right now. The guy is well qualified. Let's give him a chance to work or not work out."