Filed Under:Markets, Personal Lines

Geithner To Ask A U.S. Overseer For Shaky Insurers

WASHINGTON--Treasury Secretary Tim Geithner told a congressional committee today he will ask the full Congress on Thursday for authority to create a federal receiver for what he called "systemically important" nonbank financial firms like American International Group.

But in his testimony he sidestepped the issue of whether the primary regulator of troubled, large insurance companies would be a federal or state regulator.

In his statement, he said, "Before taking any emergency action, the Treasury Secretary would need to determine that resolution authority is necessary upon the positive recommendations of the Federal Reserve Board and the appropriate federal regulatory agency."

But asked whether that language indicated the administration would be federally regulated going forward, someone familiar with Mr. Geithner's comment would only say he was "not referring to setting up a federal insurance regulator or anything like that," just noting that "if there is an appropriate federal regulator then they would be consulted."

At the same hearing, Federal Reserve Board Chairman Ben Bernanke seconded Mr. Geithner's call for resolution authority over troubled nonbank financial institutions, saying dealing with the AIG's troubled financial situation would have been much easier if such a resolution authority existed.

Their comments were made at a hearing of the full House Financial Services Committee, the second hearing on the tumult created by AIG's payment of more than $165 million in bonuses 10 days ago to employees of AIG's Financial Products group which put the company in financial distress.

In his testimony, Mr. Geithner said AIG's problems "highlight the need for a resolution authority with the power to manage the orderly restructuring of a large, complex, nonbank financial institution that poses a threat to the stability of our financial system."

He said such a resolution authority would be modeled on the "resolution authority that the FDIC has under current law with respect to banks."

He is scheduled to unveil the administration's proposal for a broad overhaul of financial sector regulations during testimony Thursday before the same committee.

Along with the new regulating authority, the administration wants increased oversight and controls of previously unregulated markets such as hedge and private equity funds.

A source familiar with the administration proposal said Mr. Geithner is scheduled to suggest that Congress pass legislation establishing the Federal Reserve Board as systemic risk regulator and the FDIC as receiver to administer institutions deemed too big to fail.

Under the proposal, according to the sources, derivatives and financial instruments would be regulated through clearinghouses, and all financial institutions would be required to have increased capital levels.

The proposal also calls for hedge funds to be registered with the Securities and Exchange Committee and be monitored by the SEC, those sources said.

Mr. Bernanke effectively seconded Mr. Geithner's comments.

"I would note that AIG offers two clear lessons for the upcoming discussion in the Congress and elsewhere on regulatory reform," Mr. Bernanke said.

First, "AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms," he said.

If a federal agency had had such tools on September 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," Mr. Bernanke said.

"That outcome would have been far preferable to the situation we find ourselves in now," he said.

Second, "the AIG situation highlights the need for strong, effective, consolidated supervision of all systemically important financial firms," Mr. Bernanke said.

He said "AIG built up its concentrated exposure to the subprime mortgage market largely out of the sight of its functional regulators."

More effective supervision might have "identified and blocked the extraordinarily reckless risk-taking at AIG-FP," he said. "These two changes could measurably reduce the likelihood of future episodes of systemic risk like the one we faced at AIG," Mr. Bernanke added.

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