WASHINGTON — Pointing with dismay to the AIG debacle, the nation's top economic officials argued Tuesday for unprecedented powers to regulate and even take over financial goliaths whose collapse could imperil the entire economy. President Barack Obama agreed and said he hoped "it doesn't take too long to convince Congress."
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, in a rare joint appearance before a House committee, said the messy federal intervention into American International Group, an insurance giant, demonstrated a need to regulate complex nonbank financial institutions just as banks are now regulated by the Federal Deposit Insurance Corp.
"AIG highlights broad failures of our financial system," Geithner told the House Financial Services Committee. "We must ensure that our country never faces this situation again."
But the two appeared divided over where the authority should reside. Geithner suggested his Treasury Department's powers be expanded. Bernanke was noncommittal, even suggesting the FDIC.
Both officials sought to channel the widespread public outrage over the millions of dollars AIG spent in post-bailout bonuses into support for regulatory overhaul. Geithner was expected to lay out more details on the administration's plan Thursday when he appears again before the committee.
Democrats in the Senate say the administration wants the proposal on taking over non-banks to move separately from the larger financial industry regulatory bill, to get it going more quickly.
At the White House, Obama told reporters, "We are already hard at work in putting forward a detailed proposal. We will work in consultation with members of Congress. That will be just one phase of a broader regulatory framework that we're going to have to put in place to prevent these kinds of crises from happening again."
Rep. Barney Frank, D-Mass., the committee chairman, said that "when nonbank major financial institutions need to be put out of their misery, we need to give somebody the authority to do what the FDIC can do with banks."
The government has given AIG over $180 billion in bailout funds since it first intervened last Sept. 16. The U.S. now owns nearly 80 percent of the giant insurer.
"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 said.
Both Geithner and Bernanke told the panel they did not become aware of the $165 million in AIG bonuses until March 10, just days before the payments were made. However, lower-level officials at both agencies were aware of the payments.
At the time of the first AIG bailout, Geithner was the president of the New York Fed, which helped oversee the government intervention.
AIG is a globally interconnected colossus, with 74 million customers and operations in more than 130 countries.
"Its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs," Bernanke told the panel.
Bernanke said it was "highly inappropriate to pay substantial bonuses" in such a situation. He said he had asked that the payments be stopped but was told that they were mandated by contracts.
"I then asked that suit be filed to prevent the payments," he said.
But Bernanke said his legal staff counseled against this action "on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail."
Separately, Connecticut Attorney General Richard Blumenthal said the Fed "never contacted me or my office concerning the applicability of the Connecticut wage law to the AIG bonuses. If the Fed had called, we would have given the green light for litigation blocking these unconscionable bonuses."
Dealings between Congress and Geithner have been tense. But they were a little more relaxed in the afterglow of Monday's nearly 500-point surge in the Dow Jones industrials, though the Dow gave back about 116 points on Tuesday. The rise came in large part in response to the administration's unveiling of a public-private program to buy up to $1 trillion in bad loans and toxic mortgage-related securities clogging bank balance sheets.
Still, there were a few pointed exchanges Tuesday.
Rep. Paul Kanjorski, D-Pa., warned Geithner about any requests by the Obama administration for more taxpayer money to support financial bailouts.
"I assume that you recognize there's not an awful lot of sympathy up here to necessarily provide additional funds _ not going on the merits of whether the funds are necessary," he said.
"We recognize it will be extraordinarily difficult," Geithner acknowledged.
Rep. Brad Sherman, D-Calif., told Geithner: "What I fear here is that we are doing a kabuki theater in three acts.
"The first act: Washington tells the American people, `We understand your anger at Wall Street.' In the second act, we nitpick to death any proposal that actually adversely affects Wall Street. And then, in the third act, we bestow another trillion dollars on Wall Street under extremely favorable terms."
Geithner made it clear he believes the treasury secretary should be granted broad powers _ after consultation with Federal Reserve officials _ to take control of a major financial institution and run it. The treasury chief is an official of the administration, unlike the FDIC, which is an independent regulatory agency.
AIG has become a symbol of reckless risk-taking on Wall Street. The bonuses came even as AIG reported a stunning $62 billion fourth-quarter loss, the biggest in U.S. corporate history. The government has bailed out AIG four times, to the tune of more than $180 billion altogether.
New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from AIG have agreed to return the money, totaling about $50 million.
The House last week voted overwhelmingly to slap 90 percent taxes on the largest bonuses. But Republicans in the Senate are blocking similar legislation, and White House reaction to the legislation has been tepid at best.
Senate Majority Leader Harry Reid, D-Nev., told reporters on Tuesday Democrats were considering other alternatives.
"The issue is not over," he said.
But House Majority Leader Steny Hoyer, D-Md., said, "If the money is returned, the legislation may no longer be necessary."
Senate Republican Leader Mitch McConnell said Geithner should get credit for trying to fix the financial system.
"That's the real issue. And at least he's grappling with that," McConnell said.
Associated Press writers Martin Crutsinger, Ben Feller and Anne Flaherty contributed to this report.