Obama admin. seeks powers to shut firms like AIG

By Glenn Somerville and David Alexander

WASHINGTON (Reuters) - The Obama administration on Tuesday mounted a full-scale push for government authority to shut down troubled institutions like insurer AIG to avoid the need for future bailouts.

U.S. Treasury Secretary Timothy Geithner, testifying before lawmakers still fuming about big bonuses for executives at bailout recipient AIG, called on Congress for new powers to take over big non-bank financial firms that run amok.

Federal Reserve Chairman Ben Bernanke strongly backed Geithner in testimony before the same committee, and President Barack Obama took the case public in remarks to reporters.

"In the absence of that capacity you end up with the situation we've been in ... an institution that poses systemic risks to the system but a lack of capacity to close it down in an orderly fashion, renegotiate contracts, sell off bad assets," Obama said.

AIG ran a global insurance company but also had a division dealing in derivatives contracts that has been likened to a hedge fund. That unit took a big hit when the U.S. housing sector imploded, putting the entire firm at risk of a collapse that could have endangered the whole financial system.

Geithner said the government needed the same types of tools to deal with failing non-bank institutions that it already has to deal with struggling banks. Under his proposal, the Treasury chief would determine whether emergency action was needed in consultation with the Fed and the relevant regulator.

"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," he told the House of Representatives Financial Services Committee.

Congress has already begun working on a revamp of financial regulations that is expected to include authority to wind down non-bank firms. Aides at the House panel said on Monday the committee would likely vote on a bill as soon as March 31.

House Republican leader John Boehner told reporters the Treasury's request for authority to shutter non-banks sounded like "an unprecedented grab of power."

But other lawmakers were more supportive.

"I welcome it," Senate Banking Committee Chairman Christopher Dodd told reporters. "We've got to figure out a way to deal with this.

AIG POSTER CHILD FOR WIND DOWN AUTHORITY

AIG, which has been propped up with up to $180 billion from taxpayers, has become the poster child for U.S. regulatory reform. Geithner, Bernanke and New York Federal Reserve Bank President William Dudley all painted a dire picture before lawmakers of what could have happened if AIG had failed.

"Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs," Bernanke said.

Fury at the $165 million in bonuses recently paid by the insurer threatens to undercut efforts to stabilize the rickety financial sector.