Treasury Secretary Tim Geithner hopes to today send draft legislation of a bill to Capitol Hill that will give him more power to take over large financial institutions in serious trouble. The government currently has this authority with banks, but not with other financial institutions such as bank and thrift holding companies, or with holding companies that control insurance companies, futures commission merchants, and broker-dealers.
The draft legislation will — likely later today — be sent to Sen. Chris Dodd, D-Conn., chair of the Senate Banking Committee and Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee.
As written, the bill would give the Treasury Department what’s called "resolution authority," granting the U.S. government the authority to put a big financial company into receivership or conservatorship. With that authority, the government can either reorganize or shut down the company — renegotiating or reneging on contracts (such as retention bonuses for AIG executives), transferring the company’s assets and liabilities, and dealing with any derivatives portfolio.
One possible sticking point: President Obama and Secretary Geithner are seeking sole authority be given to the executive branch to put these companies into conservatorship or receivership. The legislation as written would give the decision making power to the Treasury Secretary and the chair of the Federal Deposit Insurance Corporation (FDIC), though the decision would be "informed" by the advice of the chair of the Federal Reserve Board and any other relevant regulatory agency.
"Why do you think the public should sign on for another new, sweeping authority for the government to take over companies?" asked the Associated Press’s Jennifer Loven last night at President Obama’s second presidential press conference.
"It’S precisely because of the lack of this authority that the AIG situation has gotten worse," President Obama said. "Understand that AIG is not a bank, it’s an insurance company. If it were a bank and it had effectively collapsed, then the FDIC could step in, as it does with a whole host of banks, as it did with IndyMac, and in a structured way, renegotiate contracts, get rid of bad assets, strengthen capital requirements, resell it on the private marketplace."
Noting that the government currently doesn’t "have that same capacity with an institution like AIG," the president asserted that’s "part of the reason why it has proved so problematic."
Mr. Obama said that when Americans ask questions about the handling of the AIG issue — "if we’re putting all this money in there, and if it’s such a big systemic risk to allow AIG to liquidate, why is it that we can’t restructure some of these contracts?" he characterized. "Why can’t we do some of the things that need to be done in a more orderly way?" — they need to know that in his view the answer is "because we have not obtained this authority."
Loven followed up: "Why should the public trust the government to handle that authority well?"
"If you look at how the FDIC has handled a situation like IndyBank (sic), for example, it actually does these kinds of resolutions effectively when it’s got the tools to do it," President Obama said. "We don’t have the tools right now."
The Treasury Department says that as of right now when a massive non-bank financial company is in crisis, there are only two options: to file for bankruptcy (as happened, to ill effect, with Lehman Brothers), or to secure capital from other companies or from the taxpayer (as happened, to ill effect, with AIG.)
"Had the government possessed the authorities contained in the proposed legislation, it could have resolved AIG in an orderly manner that shared losses among equity and debt holders in a way that maintained confidence in the institution’s ability to fulfill its obligations to insurance policyholders and other systemically important customers," the Treasury Department said in a press release today.