U.S. Treasury Secretary Timothy Geithner will face tough questions from lawmakers on Tuesday as he spells out the basics of the Obama administration's plans to reshape financial regulation at a high-profile congressional hearing.

Geithner faces back-to-back sessions on Tuesday and Thursday before the House of Representatives Financial Services Committee in which he will have to explain his handling of the AIG bonuses issue, as well as his plan for buying up toxic bank assets through a massive public-private venture.

Both problems have clouded Geithner's brief tenure as President Barack Obama's point man on saving the financial system and instituting reforms to prevent future crises.

But Geithner's hand strengthened on Monday when the stock market rallied strongly on the release of long-awaited details of the government's toxic assets strategy.

So he may find the committee more willing to listen as well as complain as he outlines proposals for the difficult future.

As Washington begins to shift from saving the financial system from immediate disaster to fixing it for the long haul, Geithner will propose boosting the government's role in the economy in two key ways, both meant to prevent another crisis.

Obama is expected to carry these two proposals, along with other basic principles, to an April 2 summit of the Group of 20 leading nations in London, where financial regulation reform will be a major topic.

At the top of the administration's regulatory reform list is establishing a clear government procedure for unwinding large, failing firms that are not banks.

The troubled bailout of insurer American International Group Inc underscored the lack of a process for managing failed nonbank firms, short of allowing them to declare bankruptcy. AIG has received three bailouts at a cost of up to $180 billion.

UNWIND AUTHORITY

The issue has far-reaching implications for what it means to be too big to fail in American business. Geithner is expected to discuss unwind authority in broad terms on Tuesday at the committee hearing focused on AIG.

AIG is the topic and the secretary is going to spend a lot of time talking about resolution authority, said a Treasury official, speaking on condition of anonymity.

With input from the administration, the committee is drafting legislation to establish unwind, or resolution, authority and could vote on it next week, congressional aides said on Monday.

It could resemble the long-established process used by the Federal Deposit Insurance Corp for dealing with failed banks.

An administration official said last week the president would propose ways of placing distressed nonbank 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 government would be able to impose partial losses on various classes of creditors under the proposal, while new rules would permit loans, asset purchases, equity investments or liability guarantees to stabilize firms, the official said.

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.

SYSTEMIC RISK

On Thursday, Geithner's testimony before the same House committee will focus on creating a new regulator to monitor and manage systemic risk in the financial system.

The regulator's job would be to anticipate potential problems large enough to damage the overall economy, like AIG, before they reach the crisis stage.

No single government agency has such a role today. Lawmakers are deeply divided on whether to establish such a power, as committee hearings revealed last week.

Senator Susan Collins, a moderate Republican who often bridges party divides on controversial issues, on Monday introduced financial regulation legislation that would, among other steps, create an inter-agency council to oversee overall financial risks in the economy.

A single financial regulator must be tasked with understanding the full range of risk that our financial system faces, she told the Senate.

An alternative approach, favored by some lawmakers, is to make the Federal Reserve into a systemic risk regulator.

That's not the choice that I made, Collins said. The Federal Reserve already has more than enough on its plate.

(Editing by Alan Elsner)

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