Geithner call for more power not new

by Frank James

Financial crises may result in the destruction of wealth and the dreams of many private citizens.

But they're like fertilizer for the federal government, cultivating new agencies and employees meant to address the weaknesses in the overall system exposed by the financial meltdowns.

The Federal Reserve resulted from the panic of 1907. The Federal Deposit Insurance Corp. and the Securities and Exchange Commission grew out of the market crash and bank runs that led to the Great Depression. The Office of Thrift Supervision sprung from of the savings and loan crisis of the 1980s.

So it's only in keeping with the nation's history that Secretary Tim Geithner and Fed Chairman Ben Bernanke have been expressing the need in recent weeks for expanded regulatory powers in the form a new agency or more authority for existing agencies to deal with those financial players that largely now fall through the regulatory cracks, companies like American International Group, for instance.

At a hearing of the House Financial Services Committee today, Geithner and Bernanke made some comments that are drawing attention, especially from Republican lawmakers who are accusing Geithner of an "unprecedented" power-grab. (It's not.)

Geithner and Bernanke said that if they had the power last September, they could have handled AIG differently and the bonus controversy likely would have never happened.

There was this exchange between House Chairman Barney Frank and Bernanke:

CHAIRMAN FRANK: Now, on the resolution authority, again, let me ask this directly, Mr. Bernanke: If the resolution authority had existed in September 1 of 2008, would AIG have been handled differently?

MR. BERNANKE: Quite differently. The -- it could have been taken into receivership or conservatorship. We could have -- this bonus issue would not have arisen, because all the contracts could have been adjusted by the conservator. As necessary, we could have taken haircuts against some of the counterparties without creating a default or disorderly situation.

So it's very similar, as you pointed out, to the way the FDIC would now handle an IndyMac, for example, and with some disruption, obviously, but not nearly the consequences of a failure of a -- disorderly failure of a large insurance company.

In particular, I do think that -- more specifically, I do think that this crisis has revealed some rather shocking gaps in our regulatory oversight. I mean, who was overseeing the subprime lenders, for example? Who was overseeing AIG? There simply wasn't enough adequate oversight in those cases. And it's certainly one of the things that even a -- even if you have an oversight financial stability authority which has a relatively light mandate -- really, one just information gathering and description, rather than power, direct powers -- an authority of that type could point out and identify such gaps and call them to the attention of the Congress, and Congress could then take the necessary steps.

In his prepared testimony today, Geithner made this statement:

We came into this crisis without the authority and the tools necessary to contain the damage to the American economy posed by the very severe pressures working through the financial system.

Later, he had this exchange with Rep. Michele Bachmann (R-Minn.) who asked why the U.S. didn't take over AIG the way it would take over a failed bank:

REP. BACHMANN: ... Could you tell me why AIG was not put into receivership, as opposed to conservatorship, Mr. Secretary?

SEC. GEITHNER: Again, no legal means existed under U.S. law to resolve AIG using the kind of powers available to the FDIC to resolve a bank. Because of the absence of authority, your government was faced with no good options, and we chose the best option available at the time to help protect the economy from systemic damage. If we had different authority, we would have different choices.

The Wall Street Journal reports that there's something of a disagreement between Geithner and Bernanke over who exactly should have that authority:

Both he and Mr. Geithner said such a program could be modeled on the way the Federal Deposit Insurance Corp. takes over and deals with the assets and liabilities of U.S. banks. Mr. Bernanke even suggested the FDIC could be the logical agency to wield that authority.

That marks a split with Mr. Geithner, who said such authority should rest with the Treasury. Mr. Geithner said the Obama administration wants the government to be able to act as conservator for large financial firms teetering on the brink of collapse, authority that would allow policy makers to renegotiate or cancel existing contracts, and sell or transfer a firm's assets or liabilities.

One of the most interesting aspects of the whole reaction to the financial meltdown has been how even some of the most knowledgeable people about the economy, like Bernanke, were blindsided by the holes in government oversight.

In a question and answer session last week, Bernanke repeated a thought he's expressed before, that he was shocked by porousness of the regulatory system.

I do think that this crisis has revealed some rather shocking gaps in our regulatory oversight. I mean, who was overseeing the subprime lenders, for example? Who was overseeing AIG? There simply wasn't enough adequate oversight in those cases.

It's rather scary to think that the world's most important central banker was caught by surprise by how loosey goosey the regulatory system was.

That's just the kind of reaction among policymakers that could mean that when all is said in done, they'll be a group of new federal employees sitting somewhere in Washington with responsibility for overseeing companies like AIG that until now have largely avoided that kind of federal scrutiny.