Sen. Corker's Novel AIG Wind-Down Plan
Something caught The Ticker's attention during today's long testimony of Treasury Secretary Tim Geithner before the House Banking committee: Sen. Bob Corker's (R-Tenn.) plan for granting a federal agency "one-off" authority to wind down troubled insurance giant AIG, instead of continuing to pour billions of taxpayer dollars into it.
Geithner and Fed Chairman Ben Bernanke have asked Congress for sweeping and lasting authority to wind down troubled financial institutions such as AIG whose collapse causes systemic risk. When we say "wind down," we mean to take it apart in an orderly fashion, selling off pieces that no longer make sense to the business, concluding contracts and otherwise giving a soft landing to a mighty skyscraper on the verge of collapse.
Bernanke has said that's why the federal government had to let Lehman Brothers fail last September, which really kicked off the panic -- it did not have the authority to wind it down in an orderly fashion. The FDIC has this authority with troubled small banks.
So, in today's hearing, there was Geithner, calling again for the uber-wind-down authority.
But then Corker threw Geithner a curve ball: What if, instead of that, we in Congress granted you the one-time ability to take full control of AIG and wind it down? Already, AIG has received or been promised more than $150 billion in federal money. It is 80 percent owned by the federal government.
Corker predicted such a provision would pass the Senate "100 to zero" and the House "435 to zero."
Geithner answered by repeating his plea for long-term authority.
So we called Corker this afternoon to tease out his idea a little more.
Corker said that he'd grabbed Geithner in the hallway outside of the Senate hearing room after the testimony and pressed him on the one-off plan. "I get the feeling he doesn't want it," Corker told The Ticker. "It was pretty evident in the hearing; now I'm pretty certain he doesn't want it."
Giving Treasury or the FDIC the one-time authority to wind down AIG "could be a useful exercise to go through. ... Walking through some of issues with [AIG] would be a very good exercise for when we do create permanent resolution authority," he said.
At the heart of the issue is a philosophical debate, Corker said.
Geithner's wind-down authority would involve infusing failing institutions with federal money and "propping them up," Corker said, adding that this would create a "distortion in the marketplace" that would give birth to a new wave of Fannies and Freddies; essentially, government-backed institutions.
The other way to do it, advanced by FDIC Chairman Sheila Bair, is the one that Corker favors: giving the FDIC the same authority to wind down a huge AIG as it has to wind down a failing neighborhood bank.
So, Corker is not necessarily against giving a federal agency permanent wind-down authority; he just doesn't want to do it now, or to link it to the sweeping financial sector regulatory reforms being championed by House Democrats.
"Most of us on the Senate side do not want regulatory reform in the middle of a crisis," he said.
We put in a call to Treasury spokespeople, which was not immediately returned. When we hear something back, we'll update this post.
May 20, 2009; 5:13 PM ET
Categories: The Ticker | Tags: AIG, Ben Bernanke, Bob Corker, Tim Geithner
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