New federal seizure rules sought

The nation's top two economic leaders called yesterday for new powers that would allow the federal government to take over and close failing financial companies.

The request is a result of the government's troubled and expensive rescue of insurance giant American International Group Inc. AIG was deemed "too big to fail," meaning its collapse would have endangered the whole U.S. financial sector.

"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," Treasury Secretary Timothy Geithner said in testimony to a House Financial Services Committee hearing.

While the Federal Deposit Insurance Corp. has the power to take over failing deposit-taking firms - basically, banks - and wind down their assets, no such authority exists for financial firms that aren't classified as banks, such as AIG or a hedge fund with extensive links throughout the banking system.

Federal Reserve Chairman Ben S. Bernanke, in his testimony, said, "AIG highlights the urgent need for new resolution procedures" for deeply troubled financial companies.

Bernanke and Geithner also called for stronger regulation to constrain the risks taken by firms that could endanger the financial system. The remarks presage some of the likely changes to U.S. regulations in the aftermath of the current economic meltdown, the worst financial crisis since the 1930s.

Both men repeated their opposition to bonus payments to members of AIG's financial-products division, with Bernanke saying he had initially sought a lawsuit to halt them but was dissuaded by his legal staff.

Lawmakers at the hearing stressed the public outrage over the $182.5 billion federal bailout of AIG.

Bernanke said the aid was provided to avoid a "catastrophic" collapse of the financial system.

Federal aid to AIG, banks and brokerage firms has yet to pay off for taxpayers. A downward spiral of falling home prices, declining employment and market instability has led to what economists now forecast will be the longest recession in more than 25 years.

The crisis may prompt the most sweeping overhaul of U.S. financial oversight since the Great Depression.

"AIG highlights the urgent need for new resolution procedures for systemically important non-bank financial firms," and the need for consolidated supervision of "all systemically important financial firms," Bernanke said.