US Is Rushing to Get More Control Of Financial Giants
The White House and Congress are rushing to write legislation that allows the federal government to take over and unwind the businesses of a large financial institution—such as AIG or Citigroup —the way it now can with commercial banks, CNBC has learned.
The regulatory authority—similar to the FDIC’s so-called bridge bank powers—was originally expected to be included in a broader reform package addressing systemic risk. But now it's being crafted as stand-alone legislation in the wake of the public uproar over the AIG executive bonuses.
The legislation, being spearheaded by House Financial Services Chairman Barney Frank (D-Mass.) could be ready for mark-up before Congress’ spring recess, which starts April 6, according to a senior Congressional staffer. A public hearing is also expected.
“The President has asked us to fast-track,” said the source. “Drafting is going on at both ends of Pennsylvania Avenue.”
The President Wednesday referred to the pressing need for such authority “get a proper mechanism in place,” adding he had discussed the issue with Rep Frank. It is unclear who is handling it on the Senate side, but it would presumably come under the portfolio of the Finance Committee, chaired by Chris Dodd (D-Conn.)
“What we are working on is a resolution authority that would be similar—not identical, but similar to the powers that the FDIC currently has over banks,” the President said in his comments about the AIG uproar,
FDIC Chairman Sheila Bair Thursday told Congress that the government’s policy of bailing out firms because they were too big to fail had to be replaced.
Under current law, the FDIC has so-called “bridge bank authority” to take over a troubled institution with government insured deposits. The FDIC essentially keeps the bank open for a short period of time before a pre-arranged buyer—meaning another bank—assumes control and operation. In some cases, the government actually closes the bank and pays off depositors.
The FDIC, however, does not control bank holding companies, the parent companies of the commercial banks. That is the responsibility of the Fed, but the central bank is only legally allowed to make the company take so-called prompt corrective action to deal with such things as capital requirements.
There is no temporary status for that company if it is in trouble. The only legal course is the bankuptcy court process, which could entail protection from creditors or outright liquidation, neither of which would work given the complicated counter-party nature of such operations.
The legislation now in development would apply to companies that represent a systemic risk to the financial sector and the overall economy and would thus include companies such as the insurer AIG, which the government has poured tens of billions of dollars into to help avert its failure, and Citgroup, which has a huge non-banking operation, including investment and insurance services.
That government bailout of AIG has backfired on lawmakers and the Obama administration amid continuing revelations of fat bonuses for executives and other key employees at the company. Aid for financial firms, which started under the Bush administration last October, has been generally unpopular among taxpayers and voters.
Earlier this week, it emerged that some $165 million in additional bonuses were due to a group of employees, who some say contributed to the firm’s s financial problems. Those bonuses became even more of a political football when it became apparent that they were part of legally binding contracts and had to be paid. Congress has responded by drafting a variety of bills to recover the money or impose punitive taxes on it to send a message.
Though the Obama administration has been candid about both its disapproval and frustration over the bonus situation, it has tried to move beyond the current controversy by focusing on the need for new regulatory powers.
Such authority would allow the government to seize control of companies that posed a risk to the system and unwind their businesses in an orderly, yet expeditious fashion. Such authority would presumably allow the government to amend contracts, as necessary.
The regulatory vacuum first raised eyebrows about a month ago when Federal Reserve Chairman Ben Bernanke mentioned it during a presentation to the Senate Finance Committee. That led to a chorus of calls for speedy action.
The legislation now being worked on is not yet in a stage where it addresses all the issues, according to the Congressional source. It’s unclear, for instance, where the regulatory authority would lie. Some have said the Fed is a natural choice, because it already oversees bank holding companies. Others say the FDIC should have the authority. The Treasury Dept. has also mentioned as a possible regulator.