US Treasury, Fed Stress Need To Be Able To Wind Down Non-Banks

The U.S. government needs to be able to take over and wind down a broad range of economically important non-bank financial institutions, top economic officials told Congress on Tuesday, though who will get that authority was left as an open question.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner told U.S. House lawmakers that the government's experience with American International Group Inc. (AIG) highlights the need to deal with increasingly complex and systemically important institutions.

"If a federal agency had had such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate," Bernanke told the House Financial Services Committee.

Geithner said such authority should rest with the Treasury, a step that would mark a major shift in U.S. regulatory policy. He 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 policymakers to renegotiate or cancel existing contracts, and sell or transfer a firm's assets or liabilities.

"This proposed legislation would fill a significant void in the current financial services regulatory structure with respect to non-bank financial institutions," Geithner said.

Treasury is looking to expand its oversight portfolio at a time when the White House and Congress are considering a major overhaul of the U.S. regulatory system. In addition to giving some agency resolution authority, policymakers have also said they want to give one regulatory body the ability to monitor risks to the financial system as a whole.

Bernanke, whose Federal Reserve has been frequently named as the potential "systemic risk regulator," notably didn't suggest which agency should be given oversight over non-bank financial companies. Instead, he just said the authorities need to be put in place.

"Unfortunately, federal bankruptcy laws do not sufficiently protect the public's strong interest in ensuring the orderly resolution of non-depository financial institutions when a failure would pose substantial systemic risks," Bernanke said.

The creation of any resolution authority would rely on legislation enacted by Congress, and top lawmakers suggested Tuesday they agree with the need for broader oversight over financial companies. House Financial Services Chairman Barney Frank, D-Mass., praised the way the Federal Deposit Insurance Corp. has been able to effectively deal with collapsing banks and suggested that agency should be a model for creating a system for dealing with large companies.

"We need to give somebody, somewhere in the federal government the power" to put failing non-banks "out of their misery," Frank said at the hearing.

The initial legislative steps could be taken as soon as the end of this month. Democratic staff on the Financial Services panel advised the committee last week that they could take up a bill dealing with regulation of non-bank financial companies as soon as March 31, when the committee is already scheduled to consider other legislation.

-By Michael R. Crittenden and Maya Jackson Randall, Dow Jones Newswires; 202-862-9273; [e-mail]