Witnesses call for new financial risk regulator

Treasury chief says entity would fill "a significant void" in the current system.

Federal Reserve Chairman Ben Bernanke suggested Tuesday that federal agencies could split the task of taking over troubled nonbank firms such as American International Group, whose collapse could have brought down the U.S. financial sector.

Bernanke and Treasury Secretary Tim Geithner agreed with House Financial Services Committee Chairman Barney Frank, D-Mass., during a committee hearing that Congress should pass legislation that would create an FDIC-like authority that could take over nonbanks and unwind their assets. Geithner said such an entity would fill "a significant void" in the current system that has forced the federal government to provide $182 billion in assistance to keep AIG solvent after the company suffered massive losses by engaging in credit-default swaps.

In his testimony, Geithner hinted that Treasury would play a lead role to provide help to troubled firms, purchase their assets, assume their liabilities and purchase equity interests. The government also should have the power to sell or transfer assets and liabilities as well as void or change contracts, such as the $165 million in executive bonuses to AIG employees, Geithner said.

Rep. Melvin Watt, D-N.C., told Geithner he was concerned about giving the Treasury secretary such power, suggesting that it would be better handled by officials facing less political pressure. But Geithner stressed any decision-making would be done on a consultative basis. "We want to use a mechanism built on the current FDIC model, where a judgment to intervene in some sense requires a judgment by the president and the secretary of the Treasury, by the chairman of the Fed and by the board, and ... the board of the FDIC," Geithner said.

Bernanke suggested that duties could be split, with the FDIC in charge of unwinding and selling assets, as it already does in the case of banks, and another agency in charge of regulating the safety and soundness of a hedge fund, insurance carrier or private equity firm. Bernanke did not say which agency should handle the latter. Frank said he would try to move on legislation quickly, perhaps dropping a bill into the hopper by next week.

Geithner also came under some criticism for his plan to have the federal government and private investors purchase up to $1 trillion in toxic assets to unfreeze credit markets. Rep. Michael Capuano, D-Mass., said he was concerned about the risk that the FDIC would be assuming under the plan by providing leverage funding, about 80 percent of the purchase price, for the buying of whole loans.

Geithner noted that FDIC supports the program and has had experience in unwinding such assets. Frank said he was in favor of the Geithner plan and did not share Capuano's concern. "If I thought the FDIC was going to be in danger, I would have those concerns," Frank said. "The FDIC has to be totally insulated from any failure and I'm sure it will be."