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Fed wanted to block AIG bonuses US wants power to seize insurers
(29 minutes later)
Federal Reserve boss Ben Bernanke says he wanted to take legal action to stop insurer AIG paying millions of dollars of bonuses but was advised against it. US Treasury Secretary Timothy Geithner has called for the government to be given the power to take control of struggling non-bank financial firms.
He also said that had AIG collapsed, it would have caused a 1930s-style global financial and economic meltdown. Speaking before Congress, he said the administration was proposing a new law to bring the change into effect.
Mr Bernanke was testifying before US Congress along with Treasury Secretary Timothy Geithner on the need to reform the US financial system. At present, federal authorities can seize control of troubled banks, but not other financial companies, such as insurance groups.
Mr Geithner asked for new powers to take control of failing institutions. President Obama said he hoped Congress would back the planned legislation.
Widespread outrage 'Power grab'
Mr Bernanke said it was "highly inappropriate" to pay substantial bonuses to employees at the AIG division that was the primary source of AIG's collapse. Mr Geithner said he wanted to see the creation of a new regulator for non-bank financial firms modelled on the existing Federal Deposit Insurance Corporation, which has the power to take control of any lender.
This is an unprecedented grab of power, and before that occurs, there ought to be a real debate about whether we should give that authority to the Treasury Secretary House Minority Leader John Boehner Legal action could have thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees Federal Reserve boss Ben Bernanke
However, with the exact details yet to be released, senior Republicans have already voiced their opposition, fearing that the treasury secretary himself may end up with the final decision on whether to take over any insurance company.
"This is an unprecedented grab of power, and before that occurs, there ought to be a real debate about whether we should give that authority to the Treasury Secretary," Mr Boehner, an Ohio Republican, told reporters.
Joined by Federal Reserve boss Ben Bernanke, Mr Geithner was speaking to the House of Representatives Financial Services Committee in the context of the government's financial bail-out of insurance giant AIG in September, which has cost $170bn (£121bn).
Mr Geithner said that AIG's troubles highlighted the need for a new regulatory authority to cover non-bank financial companies.
Bonus controversy
Federal Reserve boss Ben Bernanke told the committee that he had wanted to take legal action to stop insurer AIG paying millions of dollars of bonuses, but was advised against it.
Geithner: "It would have been catastrophic to let AIG collapse"
His comments come after AIG paid senior bosses a total of $165m on 15 March, a move that sparked widespread outrage in the US.
Nine of the 10 AIG executives who received top bonuses have since agreed to return them.
Mr Bernanke said it was "highly inappropriate" to pay substantial bonuses to employees at the AIG Financial Products (AIG-FP) division that was the primary source of AIG's collapse.
He said lawyers advised against legal action to prevent the payments, on the grounds that state law provided for substantial damages if the lawsuit failed.He said lawyers advised against legal action to prevent the payments, on the grounds that state law provided for substantial damages if the lawsuit failed.
"Legal action could have thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees," he said."Legal action could have thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees," he said.
AIG's decision to pay bonuses despite being bailed out by the government had sparked widespread outrage in the US. Mr Bernanke added that had AIG collapsed, it would have caused a 1930s-style global financial and economic meltdown.
Nine of the 10 executives who received top bonuses from US insurance giant AIG have agreed to return them.
New York's attorney general Andrew Cuomo said he hoped to recoup $80m (£55m) of bonus payments - which amounts to about half of the $165m paid by AIG on 15 March.
So far they have recouped about $50m.
Failures
Mr Geithner said that AIG's collapse highlighted the failures of current regulation.
He said that a new regulatory authority needed the tools to unwind an institution of the size and complexity of AIG.
"The US government does not have the legal means today to manage the orderly restructuring of a large, complex, non-bank financial institution that poses a threat to the stability of our financial system," he said.
The US has spent a total of $170bn on rescuing AIG since September 2008.
However, House Minority Leader John Boehner said he had concerns about giving the Treasury greater authority.
"This is an unprecedented grab of power, and before that occurs, there ought to be a real debate about whether we should give that authority to the Treasury Secretary," Mr Boehner, an Ohio Republican, told reporters.