Give government power to seize financial firms: Bernanke, Geithner

Pointing with dismay to the AIG debacle, the top two U.S. economic officials argued Tuesday for unprecedented powers to regulate and even take over financial goliaths whose collapse could imperil the entire economy.

U.S. 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 committee of the U.S. House of Representatives, said the messy federal intervention into insurance giant American International Group demonstrated a need to regulate complex non-bank 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."

The two appeared divided, however,over where the authority should reside. Geithner suggested his Treasury Department's powers be expanded. Bernanke was non-committal, even suggesting the FDIC.

Both officials sought to channel the widespread public outrage over the$165 million AIG spenton bonuses for its executives even after it had received a $170-billion US bailout from the federal government.

Democrats in the U.S. Senatesaid the administration wants the proposal on taking over non-banks to move separately froma larger financial-industry regulatory bill, to get it going more quickly.

Barney Frank agrees

At the White House, Obama told reporters, "We are already hard at work in putting forward a detailed proposal .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."

Representative Barney Frank, aMassachusetts Democrat andthe committee chairman, said that "when non-bank 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 now given AIG over $180 billion in bailout funds since it first intervened last Sept. 16. The U.S. now owns nearly 80 per cent 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.

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.

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.