Geithner Asks Congress for Expansive Power to Seize Non-Banks

March 24, 2009

(ChattahBox)– Treasury Secretary Timothy F. Geithner floated a new proposal before Capitol Hill today, in his opening statement to Congress, seeking to expand the powers of the Treasury Secretary, to seize control of failing non-banking institutions like Lehman Bros and AIG, which pose a substantial risk to the US economy. Along with the power to place dangerous at-risk institutions under US, control, Geithner is asking for tools to effectively contain risks to the economy, such as buying assets, taking an ownership stake and guaranteeing losses. More importantly, in light of recent AIG bonus contracts brouhaha, the new powers would allow the government to legally break existing contracts.

Federal Reserve Chairman Ben Bernanke, appearing today before Congress along side Geithner, also spoke of the importance of the new seizure powers for the Treasury to stop serious damage to the nation’s economy, from companies, such as insurance firms (AIG), investment firms and hedge funds.

As Bernanke and Geithner appeared before Congress to be grilled on AIG bonuses and other fiascoes related to firms receiving federal bailout funds, the real end game seemed to be floating a trial balloon before Congress and the American public to gage reaction to the new seizure powers requested by Treasury.

Both Bernanke and Geithner stressed that their hands were tied in dealing with the massive economic collapse of AIG and other non-banks, because Treasury didn’t have the power “wind down” the operations of AIG, at a far less cost to taxpayers.

The new seizure proposal was also floated in an article in the Washington Post this morning. Both Bernanke and Geithner made the point of saying during their opening statements before Congress; that if Treasury had such seizure powers before the economic collapse, it would have seized AIG and other firms like it, rather than handing over bailout funds. They both said that neither bankruptcy laws, nor the ability to infuse non-banking firms with cash, as in the bailout, offered ideal solutions to failing firms that threatened our economy.

Geithner plans to introduce the actual bill before the legislature on Thursday, detailing the new Treasury powers. The intriguing back story to the request for these new powers; is the agency that will ultimately wrestle control to act as the systemic risk regulator, to determine what non-banks pose a risk. Geithner wants that function to go to the Federal Reserve. Others see the FDIC as a more neutral-non-political agency to handle systemic risk, which it already has experience in doing with banking institutions.

Critics say empowering the Fed, as the systemic risk regulator would pose a conflict with the Fed’s duties to control monetary policy. It seems there will soon be a power struggle developing between the FDIC and the Fed to gain control of the risk regulatory powers.

The Executive Branch and the Fed will perform the necessary checks on the Treasury’s new power, by requiring consultation with the President and a two-thirds vote from the Federal Reserve Board, before any seizures can be implemented.

It will be interesting to see the exact details of the new bill on Thursday, and what agency will be designated to handle the risk regulatory powers.


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