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Geithner and Bernanke Testify on AIG, Regulation

March 24, 2009 at 6:00 PM EST
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Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke testified before Congress on the administration's handling of executive compensation for companies receiving federal loans and asked for expanded federal regulatory powers. Jeffrey Brown reports.
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JIM LEHRER: The U.S. Treasury called today for regulating non-banking financial companies, such as AIG. Secretary Timothy Geithner faced a House hearing days after congressional anger exploded over the AIG bonuses.

Jeffrey Brown has our lead story report.

JEFFREY BROWN: At the outset, Secretary Geithner and the chair of the Federal Reserve, Ben Bernanke, moved to try to defuse the tensions of last week over the AIG bonuses. Geithner asked lawmakers to give the Treasury new power to seize crucial financial firms in the future, if necessary.

TIMOTHY GEITHNER, Treasury Secretary: AIG highlights very broad failures of our financial system. Our regulatory system was not equipped to prevent the build-up of dangerous levels of risk. Compensation practice rewarded short-term profits over long-term financial stability, overwhelming the checks and balances in the system.

The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, to purchase its obligations or assets, to assume or guarantee its liabilities, and purchase an equity interest.

The U.S. government, as conservator or receiver, would have additional powers to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution’s contracts, and prevent certain financial contracts with the institution from being terminated on account of conservatorship or receivership.

Bernanke defends AIG rescue

JEFFREY BROWN: The Federal Reserve mounted the initial rescue of AIG last fall, and Chairman Bernanke defended that move today. He said the insurance giant could have taken the financial system down with it.

BEN BERNANKE, Federal Reserve Chairman: At best, the consequences of AIG's failure would have been a significant intensification of an already severe financial crisis and a further worsening of global economic conditions. Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.

JEFFREY BROWN: But Bernanke's reasoning did not mollify Illinois Republican Don Manzullo. He demanded to know, in essence, if AIG's investors were rescued at the expense of everyone else.

REP. DON MANZULLO (R), Illinois: The American people paid $40 billion so people with retirement plans that had insurance with AIG did not have to lose. Isn't that correct?

BEN BERNANKE: They lent $40 billion to avoid a catastrophic collapse of the financial system.

REP. DON MANZULLO: Can you give me a "yes" or a "no," anybody there, please?

BEN BERNANKE: You said it was the purpose. That was not the purpose.

REP. DON MANZULLO: I've got 14 percent unemployment back home. We could lose lots of factories. People are desperate. Half the people have lost half their retirement or most have lost half of their retirement, and not one of you three can give me a "yes" on that answer or "no."

BEN BERNANKE: Because it's a poorly posed question.

Bonus rage persists

JEFFREY BROWN: On a separate note, New York Democrat Gary Ackerman pressed for get-tough regulation of other companies that insure mortgage-backed securities with credit default swaps, as AIG did.

REP. GARY ACKERMAN (D), New York: You know, if we discover that an airplane has a faulty flickem, whatever that might be, you know, they'll usually ground the whole fleet that has them, you know, because of obvious reasons. Are we looking at doing that, these other companies with credit default swaps, to a large extent, to see if we can ground them until we fix the mechanism?

BEN BERNANKE: Well, that would have negative, as well as positive effects, because some companies use the credit default swaps in order to hedge, that is, to protect themselves, as opposed to taking gambles, in the case of AIG.

REP. GARY ACKERMAN: I just want to suggest that we take a very, very close look at that, because there is a clear and present danger here that, just like we're finding that there are many Madoffs, there are many AIGs out there. And before we have to start bailing them all out, maybe we should ground some of them, too.

JEFFREY BROWN: Even amid today's focus on future regulation, the rancor over past bonuses paid to AIG executives was hardly forgotten. And some committee members pressed Secretary Geithner for more details on his own involvement.

REP. MIKE CASTLE (R), Delaware: Mr. Geithner, there are many reports that, back in September, when all this was done, you were president of the Federal Reserve Bank of New York, that you were heavily involved in this, and you probably had knowledge of the bonus payments, at least that they may occur at that point. Can you tell us when you first really knew that these bonus payments to AIG would be made?

TIMOTHY GEITHNER: Congressman, I was deeply involved in the decisions to intervene in AIG and the initial restructuring decisions made. I knew that we had big mess on the compensation side to deal with, but I did not have -- I should have had, but I did not have detailed knowledge of these particular legally contracted retention bonuses for AIG-FP, until, as I said, I was briefed by my staff on March 10th.

Even though there was -- a lot of this information was in the public domain, I was not aware of the details of that until March 10th, but it would not have affected our choices at that time because of the legal nature of those contracts.

Bernanke explains bonus position

JEFFREY BROWN: Fed Chairman Bernanke recalled in his opening statement that he'd wanted to take legal action when he first learned about the bonuses.

BEN BERNANKE: I asked that the AIG-FP payments be stopped, but was informed that they were mandated by contracts agreed to before the government's intervention. I then asked that suit be filed to prevent the payments. Legal staff counseled against this action on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail.

JEFFREY BROWN: The House voted last week to tax 90 percent of the bonuses. The Senate has now delayed action on a similar bill until late April.

But Majority Leader Harry Reid insisted today the issue remains alive.

SEN. HARRY REID (D-NV), Senate Majority Leader: The issue is not over, and that's an understatement. So far, because of the pressure that Congress has applied, the New York attorney general, some of the top recipients of the AIG bonus plan have given their money back.

This is a start. AIG should continue working to renegotiate these bonuses or return them, as we have demanded in our letter last week.

White House stance on bonuses

JEFFREY BROWN: For its part, the Obama White House has signaled misgivings about trying to tax the bonuses. Today, the president focused on the future, urging action on regulating companies like AIG. He spoke as he met with Australian Prime Minister Kevin Rudd.

JOURNALIST: Secretary Geithner told members of Congress this morning that he needs the authority to shut down non-bank financial institutions like AIG when they get into trouble. Should that authority properly with Treasury Department directly or through an existing regulator? And how long do you think it'll take to convince Congress?

BARACK OBAMA, President of the United States: Well, I hope it doesn't take too long to convince Congress.

Right now, we do not have resolution authority for a non-bank institution like AIG that is comparable to what we have for banks that get into trouble using the FDIC.

And in the absence of that capacity, you end up with the situation that we've been in, a systemic or an institution that poses systemic risks to the system, but a lack of capacity to shut it down in an orderly way, renegotiate contracts, sell off bad assets, and do so in a way that doesn't endanger the entire system.

JEFFREY BROWN: Mr. Obama is expected to expand on that theme tonight in his second prime-time news conference. It can be seen at 8 p.m. Eastern time on most PBS stations.