Geithner Calls for More Power to Regulate Financial Institutions

The treasury secretary wants the power to regulate nonbanks that offer financial services.

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Just one day after the Treasury Department's announcement that the government will work with private investors to buy up to $1 trillion in toxic assets from banks, Secretary Timothy Geithner appeared before a key congressional committee today to make another request: that his authority be expanded to seize not only troubled banks but other financial institutions, as well.

Thus far, the Treasury Department has the power to take over banks only, not businesses like investment firms or insurance companies that offer financial products. But Geithner argued this morning that if the government had had that power earlier, it could have seized AIG last fall and wound it down, avoiding snafus like last week's payments of $165 million in bonuses to top AIG executives, which have caused widespread public outrage.

Proposing legislation that would allow the government to use "the same basic set of tools" for addressing problems at nonbanks as at banks, Geithner said that the requested powers would include authorizing the government to make loans to a firm, purchase its obligations or assets, assume its liabilities, and purchase equity interest. The authority would also permit the government to break contracts that the firm had assumed, like the agreements that led to last week's bonus payouts.

The plan will need to be approved by Congress. That could prove tricky for Geithner, whose handling of the financial crisis has been criticized by a number of legislators. But the markets' sharp gains following his announcement yesterday of the toxic assets plan may be seen as a vote of confidence that could help him.

In his testimony, Geithner also underlined, along with Federal Reserve Chairman Ben Bernanke, that the whole crisis shows a need for increased regulation of financial institutions. "Our regulatory system was not equipped to prevent the buildup of dangerous levels of risk," he told the House Financial Services Committee, calling that lack "a tragic thing." On Thursday, Geithner will testify before Congress again to outline further plans for regulatory reform.