“Treasury Secretary Timothy F. Geithner today told Congress the administration will seek unprecedented power to seize non-bank financial companies whose collapse could jeopardize the economy, a move Geithner said would have allowed the government to bail out insurance giant American International Group at a far lower cost to taxpayers.
The government at present has the authority to seize only banks.
Allowing the Treasury Department to take over a broader range of companies, such as large insurers, investment firms and hedge funds, would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president’s Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators.
…. Rep. Barney Frank (D-Mass.) seemed inclined to support Geithner’s request, saying the government should have the same power over all financial services firms as the Federal Deposit Insurance Corporation does over banks.
“Banks also failed in 2008 . . . But the fact is that we have in place mechanisms . . . that contained the damage,” Frank said. ” . . . We need to give somebody, somewhere in the federal government. . . the power to do what the FDIC can do with banks.
The administration’s proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed’s other responsibilities, particularly its control over monetary policy.
The government also would assume the authority to seize such firms if they totter toward failure.
Besides seizing a company outright, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.
The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.
The authority to seize non-bank financial firms emerged as a priority for the administration after the failure of investment house Lehman Brothers, which was not a traditional bank, and the troubled rescue of AIG.
The powers would parallel the government’s existing authority over banks, which are exercised by banking regulatory agencies in conjunction with the FDIC. Geithner has cited that structure as the model for the government’s plans.”
I recognize that request fits neatly into the “ohmigod-Obama-is-trying-to-take-over-the-world” narrative favored by many of his critics. But if you look a little deeper the idea makes a lot of sense, and in fact is downright necessary.
The government already holds the power to take over troubled banks. Why? Because it also has the obligation to make good on the banks’ deposits should things go wrong, and because we learned the hard way that bank runs have the capability to bring down an entire economy.
Now we’ve learned — again the hard way — that AIG and other non-bank institutions also have gotten “too big to fail,” that government intervention is required if they do, and that their collapse would be enough to bring down the entire economy.
The power Geithner seeks should have checks and balances built into it — approval of two-thirds of the Federal Reserve Board is one such check. But its power that modern government needs.