Establishing a formal process for the US government to unwind failing non-bank financial firms, like AIG, has moved to the top of the Obama administrations financial regulation reform agenda, sources familiar with discussions said late on Friday.
While Treasury Secretary Timothy Geithner is expected to unveil the bare outlines of that agenda next week, sources told Reuters that President Barack Obama has put "unwind authority" on a fast track and wants urgent legislation from Congress. For now, that priority will sideline other initiatives, such as setting up a "systemic risk" regulator, taking steps to protect consumers and investors, and restructuring the US financial oversight bureaucracy, the sources said.
The governments handling of the problems at Bear Stearns and the Lehman Brothers collapse in 2008, as well as the AIG affair, were severely complicated by the lack of a clear administrative procedure for dealing with such situations. The Federal Deposit Insurance Corp has a long-established process for bringing failing banks under government control, but there is no such procedure for non-bank institutions.
FDIC Chairman Sheila Bair told a Senate committee on Thursday that her agencys process for dealing with troubled banks could also be applied to non-bank financial firms. At the same Senate committee hearing, US Comptroller of the Currency John Dugan, also a bank regulator, said a national systemic risk regulator, whichever agency that may be, and the Treasury Department, not the FDIC, should be responsible for resolving the problems of failing non-bank firms.
In any case, an Obama administration official told Reuters this week that the president wants new tools to ensure that the government can deal with important non-bank institutions in danger of bankruptcy that pose risks to the financial system. The president will propose methods for putting such firms in conservatorship or receivership, as well as powers to control their operations and to sell or transfer parts of them to reduce risky positions, the official said.
In addition, the government would be able to impose partial losses on various classes of creditors, the official said. New rules would allow for loans, asset purchases, equity investments or liability guarantees to help stabilise firms, although steps like these would be subject to close review. The Treasury secretary would have the authority to act only after consultation with the president and upon recommendation of two-thirds of the Federal Reserve Board, the official said.
Geithner is scheduled to testify to a House committee on Tuesday on AIG, along with Fed Chairman Ben Bernanke. On Thursday, Geithner is scheduled to testify on financial regulation reform before a House committee. He has been expected to unveil regulation reform proposals before then.