U.S. Treasury Secretary Timothy Geithner on Thursday defended the costly bailout of insurer AIG and urged swift regulatory reform to safeguard the economy from the failure of big financial firms.
Before Congress' Joint Economic Committee, Geithner faced fierce criticism of his role in the rescue of American International Group Inc in 2008, when he was president of the New York Federal Reserve Bank.
Geithner said AIG's failure posed as significant a risk to the economy as the collapse of investment bank Lehman Brothers, which sparked a panic that froze global trade and threatened to topple the entire financial system.
The United States of America ... came into this crisis without anything like the basic tools countries need to contain financial panics, he said. Coming into AIG, we had basically duct tape and string.
The AIG bailout has become a symbol of outrage over the failings of Wall Street and the government's $700 billion bailout fund, complicating the White House's efforts to get a regulatory reform bill passed.
Congress has been wrangling over how best to revamp financial rules to give the government tools to prevent another crisis, while striking the right balance between clamping down on risky lending and hampering the flow of credit.
The U.S. House of Representatives Financial Services Committee has been working on a bill for weeks, and the Senate Banking Committee kicked off a similar effort on Thursday.
Senator Richard Shelby, the top Republican on the Senate panel, said he would not support a bill put forward by Senator Christopher Dodd, the Democrat who chairs the committee, and called for a complete rewrite.
PRESSURE ON BAILOUTS, CHINA
Geithner said because the United States had no authority to seize and wind down complex financial firms that were in danger of collapse, it had no choice but to step in when the failure of AIG appeared imminent in September 2008.
A jump in the unemployment rate to above 10 percent has sparked complaints that Washington was quick to rescue Wall Street but ignored the plight of those who lost their jobs in a recession blamed partly on reckless lending.
Representative Peter DeFazio, an independent-minded Democrat from Oregon, told MSNBC television on Wednesday that Geithner should not be in his job.
At the hearing on Thursday, Representative Kevin Brady, a Republican, similarly called for Geithner's resignation over his handling of the economy and AIG.
Conservatives agree that as point person, you failed. Liberals are growing in that consensus as well, Brady said during a tense exchange with Geithner. For the sake of our jobs, will you step down from your post?
Geithner responded by defending the actions he and others in the Obama administration took to restore financial calm and economic growth, and the White House later rose to his defense.
Secretary Geithner has helped steer the American economy back from the brink, said White House spokeswoman Jennifer Psaki. We invite anyone with good ideas, whether they agree with us or not, to be a part of the productive effort toward (an economic) solution.
In another tense moment, Senator Charles Schumer, a Democrat, criticized Geithner for treading too softly on the controversial issue of China's yuan currency, which Schumer has long argued is intentionally undervalued.
Schumer and Senator Lindsey Graham, a Republican, on Thursday asked the U.S. Commerce Department to investigate whether China was manipulating its currency to give it a trade advantage.
Geithner used his testimony to press the case for action on reforms before momentum faded and argued that the largest institutions need oversight from a single, strong regulator.
The regulation of the largest, most interconnected firms requires tremendous institutional capacity, clear lines of authority and single-point accountability. This is no place for regulation for council or by committee, he said.
As part of a sweeping reform plan, the Obama administration has proposed that the Federal Reserve be given powers to oversee the largest firms. Geithner's comments signaled opposition to proposals to give that authority to a council of existing regulators instead of to the central bank.
(Additional reporting by Rachelle Younglai; Editing by Padraic Cassidy and Dan Grebler)