The U.S. Treasury Department announced a proposed legislation Wednesday for a resolution authority that would give it sweeping powers to shut down or reorganize failing financial institutions that pose a threat to the country's financial system.
The proposal could pave the way for nationalizing banks besides effectively shifting some authority now held by the judiciary to the executive branch to speed up the perceived slow-moving bankruptcy proceedings.
It would also give the government better leverage to handle the failure of giant and deeply intertwined financial firms like troubled insurer American International Group (AIG) and banking titan Citigroup (C)--companies that have benefited from the billions of dollars in federal aid amid fears their collapse could bring down other large companies, and much of the economy with it.
Treasury Secretary Timothy Geithner will ask Congress Thursday to give him powers under the resolution authority, which would broaden the range of companies that can be taken over similar to those that allow the Federal Deposit Insurance Corp. to seize smaller banks.
This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies and futures commission merchants, a Treasury statement Wednesday said of the legislation, which the House Financial Services Committee will consider on an expedited basis, pointing to big financial companies that now escape the full reach of regulators.
Under Geithner's proposal, many of the companies, mainly investment banks, that took outsized risks such as Goldman Sachs and Morgan Stanley, which aren't subject to the same scrutiny as commercial banks, could be subject to seizure by the government just as smaller community banks are now.
These investment banks have since petitioned to become bank holding companies, making them eligible for taxpayer bailout money.
That authority also would allow regulators, after seizing banks, to cut compensation to executives that mismanaged their firms and to force investors to take losses. To seize a company, the treasury secretary would need approval from the Federal Reserve Board and the regulatory agency with closest supervision powers.
The legislation would authorize the U.S. government, in appropriately limited circumstances, to intervene at the appropriate time to avert the systemic risks posed by the potential insolvency of a significant financial firm, the Treasury said.
Insufficient seizure powers is one reason that taxpayers were asked to bail out insurance behemoth AIG, whose financial operations were deemed too big to fail last September without endangering the global financial system.
Geithner's push for broader powers is a prelude in what is expected to be a yearlong drive toward revamping federal regulation of the U.S. financial system, which would involve piecemeal regulatory changes rather than moving a single broad package to overhaul the system.
One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions besides banks, but our current regulatory system provides few ways to deal with these risks, Geithner said in prepared remarks delivered to the Council on Foreign Relations in New York Wednesday. However, he rejected the idea that an overhaul of the system should wait until the end of the financial crisis.
We're going to do whatever it takes to get through the crisis, but we want to get started now on regulatory changes, he said, promising prudential changes that will limit how much borrowed money financial firms can invest, a practice called leveraging. He also hinted at new requirements for banks to have more cash on hand to weather storms.
Some changes can also be expected through the tax code with President Barack Obama already proposing taking away the preferred tax status enjoyed by private-equity firms and hedge funds, which invest pools of money for the ultra-wealthy.
Other changes are likely to effected in gradual manner, and they could eliminate some government agencies through mergers of bank regulators. There also seems to be widespread support for a single agency--perhaps the Federal Reserve Board--to have the authority to act as a super-regulator, empowered to act against any threat it sees to the U.S. financial system.
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