Tuesday, March 24, 2009

Obama Makes His Move

The White House may finally move to seize debt-ridden insurance companies. The Washington Post says that Treasury Secretary Timothy F. Geithner has asked Congress for authority to take over non-bank financial institutions whose failure could torpedo the American economy.

The target is AIG, the giant American International Group.

The idea seems to be that it's cheaper for the government to simply take over AIG, pay out its book value to its creditors, and then get it back in business with a clean slate and return it to private ownership. The key is to keep the business operating as a going concern while the government resolves the company's crushing debt load.

"The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy.

"The government also would assume the authority to seize such firms if they totter toward failure.

"Besides seizing a company outright, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit."

While the Republican insurgency will try to block the move it appears that there's enough support among congressional Democrats to push it through.

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