The Federal Reserve’s chairman and the secretary of the treasury are making a rare joint appearance at a congressional hearing, ostensibly to take a scolding over the handling of bonuses at AIG, the giant insurance company that has become the symbol of reckless risk-taking on Wall Street.
But after venting their spleen yet again at a House hearing Tuesday, lawmakers also were expected to press Fed boss Ben Bernanke and Treasury Secretary Timothy Geithner on the new risks to taxpayers from their latest effort to save tottering banks and the U.S. economy: a plan to take over up to $1 trillion in dodgy mortgage securities with the help of private investors.
At the same time, Bernanke and Geithner are likely to once again call on Congress to enact legislation that would allow the government to safely dismantle a big financial institution, like American International Group Inc., to minimize any damage to the U.S financial system and the broader economy.
Obama last week said his administration soon will propose new financial industry oversight that includes a "resolution authority" with powers similar to those of the Federal Deposit Insurance Corp., which can seize control of banks, take over their bad assets and sell the good ones to competitors.
The proposal would give the treasury secretary the unprecedented power, after consulting with officials at the Fed, to take control of a major financial institution and run it. The treasury chief is an official of the administration, unlike the FDIC, which is an independent regulatory agency.
At Tuesday’s hearing Geithner "will focus on the need for the government to address companies and markets that pose systemic risks to our financial system, ensuring that we close the gaps in the regulatory framework and that we never have to face situations like AIG again," treasury spokesman Andrew Williams said.
The toxic assets plan is a crucial part of the Obama administration’s strategy to prop up banks and stabilize the financial system. If the bad assets are taken off banks’ books, they’ll be in a better position to lend more freely to customers.
Under details released Monday, the plan will take $75 billion to $100 billion from the government’s existing $700 billion financial-bailout pot. The government will pair this with private investments and loans from the FDIC and the Fed to generate $500 billion in purchasing power. Geithner says purchases eventually could grow to $1 trillion — roughly half of the estimated $2 trillion of toxic assets on bank books now.
The fleshed-out plan is designed to help place a value on damaged mortgage loans and other toxic securities.
If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses.
AIG’s decision to pay millions in bonuses has created a public relations headache for President Barack Obama at a time when he is trying to gin up public and political support for his economic policies, bank-rescue plan and overhaul of the nation’s regulatory structure.
AIG is a globally interconnected colossus, with 74 million customers worldwide and operations in more than 130 countries. The government decided it was simply too big to let fail.
As a result, the government has bailed out AIG four times to the tune of more than $180 billion. The company recently paid at least $165 million in bonuses to employees who worked in a division that has been blamed for the insurance company’s near-collapse last year. The bonuses came even as AIG reported a stunning $62 billion loss, the biggest in U.S. corporate history.
New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from AIG have agreed to return them in full, totaling more than $30 million.
Over the past 18 months, AIG was the case that angered him the most, Bernanke says. He says he "slammed the phone more than a few times on discussing AIG."
Government bailouts of AIG, Citigroup Inc., Bank of America Corp. and others have put billions of taxpayers’ dollars at risk over the past year and angered the American public.
"These actions have involved extremely unpleasant and difficult choices," Bernanke said last week. However, a failure of a huge, globally interconnected company would have had potentially devastating effects on the financial system and the broader economy. "I do not think we have had a realistic alternative to preventing such failures," he added.