Treasury Secretary Tim Geithner proposed that the Treasury be the one to make the first call of when a nonbanking firm, such as AIG or Lehman Brothers, is in deep trouble and needs government intervention. Treasury would do so after talking with the Federal Reserve and the president, according to Treasury plans.
But the Treasury would work with the Federal Deposit Insurance Corp. to determine the crucial question of which nonbanking firms should be kept alive with loans or other funding and which need to die.
For days, Geithner has been saying that he needs more power to step in to prevent the kind of collapse of the financial sector that threatens to deepen the recession.
"One of the key lessons from this crisis, of course, is the destabilizing danger that can come from institutions outside the banking system that are vulnerable to some of the same basic pressures that led the United States a century ago to put in place a full range of protections around banks," Geithner said Wednesday in New York.
Treasury says the new "resolution authority" would either make loans, purchase shares or put the non-banks into receivership, according to new details.
Under the proposal, the Treasury would assess these nonbanking financial firms in the same way that banks are assessed by the FDIC to fund takeover efforts when banks go bad. The size of such assessments is unclear.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said Tuesday that he supported expanding federal powers to regulate non-banking financial firms.
However, lawmakers said they were concerned about giving so much power with a political appointee, and they preferred to tap the Federal Reserve to administer such a program.
Rep. Mel Watt, D-N.C, said on Tuesday that he was concerned about such broadened power going to a "political appointee as opposed to somebody who is not subject to political pressures -- theoretically, at least, Chairman Bernanke and the Fed is not subject to those -- the politics of the day."
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