UPDATED:
Treasury Secretary Timothy Geithner told a congressional panel Tuesday that the administration is exploring legal avenues to recoup bonuses paid at bailed-out insurance giant American International Group.
Mr. Geithner and Federal Reserve Chairman Ben Bernanke, who said he wanted to sue to stop the bonuses paid out in February, made the remarks as they faced a scolding over the bonus fiasco from members of the House Financial Services Committee.
Mr. Geithner and Mr. Bernanke expressed regret that legal restrictions prevented the administration from stopping the bonus payments.
“Treasury is now working with the Department of Justice to determine what legal avenues may be available to recoup retention bonuses that have already been paid,” Mr. Geithner said. “Treasury will also impose on AIG a contractual commitment to pay the Treasury, from the operations of the company, the amount of the retention awards just paid.”
He said the Treasury also would deduct the amount of the bonus payments for the recent commitment of another $30 billion to continue to prop up the firm.
Mr. Geithner tried to use the frustration over the bonuses to support his request for sweeping new authority to seize control of banks, confiscate bad assets and sell good assets.
Those types of powers are currently vested in the Federal Deposit Insurance Corporation. The government only has authority to size control of banks, not other financial institutions such as AIG.
The administration and AIG are under fire for the company paying $165 million in bonuses while being kept afloat with a $170 billion infusion from the government.
Capitol Hill lawmakers and voters have been clamoring to reclaim the bonuses, which in some cases went to workers in the same trading offices that brokered the risky investment packages blamed for Wall Street’s woes.
The House, fueled by the outrage, last week quickly passed a bill that would slap a 90 percent tax on such compensation deals. The Senate, however, put the brakes on the frenzied dash to pass the legislation, as Democrats broke with their congressional leaders over the tax plan and President Obama urged a more cautious approach.
The anger on Capitol Hill also could jeopardize the administration’s plan announced Monday for a public-private partnership to buy toxic assets mostly bundles of bad mortgages in order to unfreeze credit markets, said Rep. Jeb Hensarling of Texas.
“For your plan to succeed, it needs confidence. And for there to be confidence restored, there must be openness, accountability and honesty,” he told Mr. Geithner. “As one of my colleagues told me last evening, if you like the way the government has been running AIG, you’re going to love socialized health care.”
Rep. Paul E. Kanjorski, Pennsylvania Democrat, said the administration deserved to be the target of the American people’s outrage over the bonuses, though he conceded the depth of the economic crisis forced the federal government to take unprecedented actions.
“If federal officials had exercised effective, proactive oversight at the company, we could have prevented this problem,” Mr. Kanjorski said. “Going forward, I would like the Federal Reserve and Treasury to be more active and transparent in their oversight of AIG.”
In pressing for added regulatory muscle to take over non-bank financial companies, Mr. Geithner and Mr. Bernanke said it would help reduce damage that failing firms inflict on the rest of Wall Street and throughout the national economy.
“As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can,” Mr. Geithner said. “The administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context.”
Much of the speculation that plagued AIG and other U.S. financial giants occurred in subsidiaries not overseen by traditional financial regulators.
Mr. Bernanke said the continuing drama from the AIG bailout highlights the need for stronger power for government intervention in failing non-bank firms and for more effective oversight of the financial industry.
“These two changes could measurably reduce the likelihood of future episodes of systemic risk like the one we faced at AIG,” Mr. Bernanke said.
Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, expressed support for the new federal seize-and-sell power.
“We need to give somebody somewhere in the federal government the power to do, 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,” he said.
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