In planned testimony on Capitol Hill Tuesday, Geithner will also ask for new powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to White House spokesman Robert Gibbs.
“We need resolution authority to go in and be able to change contracts, be able to change the business model, unwind what doesn’t work,” Gibbs said.
In prepared testimony, Geithner said Congress should approve legislation giving the government the ability to step in to put a major institution under conservatorship and avoid a damaging bankruptcy, according to news agencies.
“As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can,” Geithner planned to tell lawmakers. “The administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context.”
Word that AIG company paid more than $165 million in bonuses to executives sparked a public outcry, and prompted 15 AIG employees to agree to return their bonuses, amounting to $50 million, the New York Times reported on Monday.
President Obama addressed the issue in an essay printed in 31 newspapers around the world Tuesday, saying: “Rigorous transparency and accountability must check abuse, and the days of out-of-control compensation must end. Instead of patchwork efforts that enable a race to the bottom, we must provide the clear incentives for good behavior that foster a race to the top.”
Ahead of next month’s summit of 20 nations on the global financial downturn, the president wrote that the United States and other countries must work together to address the far-reaching problems.
“My message is clear. The United States is ready to lead, and we call upon our partners to join us with a sense of urgency and common purpose. Much good work has been done, but much more remains,” he wrote.
“We are living through a time of global economic challenges that cannot be met by half measures or the isolated efforts of any nation,” Mr. Obama said. “Now, the leaders of the Group of 20 have a responsibility to take bold, comprehensive and coordinated action that not only jump-starts recovery, but also launches a new era of economic engagement to prevent a crisis like this from ever happening again.”
President Obama also is planning to hold his second primetime news conference Tuesday at 8 p.m. ET.
Also Tuesday, Geithner and Federal Reserve Chairman Ben Bernanke, along with William Dudley, president and chief executive officer of the Federal Reserve Bank of New York, appeared before the House Financial Services Committee’s second hearing on AIG.
“AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms,” Bernanke said in prepared testimony to the House of Representatives Committee on Financial Services.
Bernanke defended the decision to prop up the firm, saying its failure “could have resulted in a 1930’s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.”
Bernanke also planned to say that he found the payment of $165 million in bonuses “deeply troubling” following the government’s rescue, which has totaled around $180 billion.
Bernanke said he tried to stop these payments but was warned that if the lawsuit failed, it could end up with the bonus recipients getting two or three times as much money.