ENGLISH DEYEA NEWS

US Treasury and Federal Reserve chiefs asked Congress today for unprecedented powers to seize financial companies outside the banking system in a bid to maintain economic stability.

Agence France | The government currently has the authority to take over only banks, and the new requested powers could enable authorities to rein in large insurers, investment firms and hedge funds during a financial turmoil.

Testifying at a congressional hearing, Fed chairman Ben Bernanke and Treasury Secretary Timothy Geithner said the new powers could come under rewritten rules to tighten regulation of the financial system following the havoc caused by a US home mortgage meltdown that triggered global turmoil.

They cited the example of the unprecedented government multibillion dollar bailout of US insurance giant American International Group (AIG) in September last year in a desperate bid to what they said prevent global catastrophe.

"AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms," Dr Bernanke told the House of Representatives financial services committee.

"If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate," he said.

"That outcome would have been far preferable to the situation we find ourselves in now," he said apparently referring partly to criticism that highlighted the government's lack of powers to stop AIG from using $US165 million of state bailout funds to pay for staff bonuses.

The AIG situation also highlighted the need for "strong, effective consolidated supervision of all systemically important financial firms," Dr Bernanke said.

The US government has so far pumped about $US170 billion into the multinational insurance titan to keep it afloat, fearing its collapse could deepen a market-wide liquidity crisis.

"The US government does not have the legal means today to manage the orderly restructuring of a large, complex, non-bank financial institution that poses a threat to the stability of our financial system," Mr Geithner said.

He said the US regulatory system was not equipped to prevent the buildup of "dangerous levels of risk", citing also compensation practices that encouraged what he called "risk-taking and rewarded short-term profits over long-term financial stability".

Mr Geithner said the administration and Congress had to work together to enact comprehensive financial regulatory reform and eliminate gaps in supervision.

"All institutions and markets that could pose systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking," he said.

"Regulators must apply standards, not just to protect the soundness of individual institutions, but to protect the stability of the system as a whole."

Mr Geithner also called for a new resolution authority so that the federal government had the tools it needed to unwind non-bank financial institutions such as AIG.

US President Barack Obama's administration plans to send legislation proposing the new financial rules to Capitol Hill this week, the Washington Post said today.

It said that giving the government authority over a broader range of companies would mark a significant shift from the existing model of financial regulation.

Current regulation relies on independent agencies that are shielded from the political process, it said.

The Treasury secretary, a member of the president's cabinet, would exercise the new financial regulatory powers in consultation with the White House, the Federal Reserve and other regulators, according to a document cited by the newspaper.

The US move comes ahead of a G20 summit of developed and developing nations in London on April 2 to be attended also by Mr Obama, who wants to discuss a global strategy to improve financial rules aimed at fuelling economic recovery.