Fed, Treasury furious at AIG bonuses

WASHINGTON: The top two US financial leaders called for new powers to take over and wind down failing financial companies after the government���s troubled rescue of American International Group Inc.

���As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can,��� Treasury Secretary Timothy Geithner said in prepared testimony to a House Financial Services Committee hearing in Washington. Federal Reserve Chairman Ben S Bernanke said ���AIG highlights the urgent need for new resolution procedures.���

Bernanke and Geithner also called for stronger regulation to constrain the risks taken by firms that could endanger the financial system. The remarks foreshadow some of the likely changes to US regulations in the aftermath of the worst crisis since the 1930s.

The two also reiterated their opposition to bonus payments for AIG���s financial-products division, with Bernanke saying he had initially sought a lawsuit to halt them. The attempt provides new details on officials��� attempts to halt the $165 million payout, news of which sparked a furor that spurred the House to pass an excise tax on bonuses at firms that receive more than $5 billion of federal aid.



���It was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG���s collapse,��� Bernanke said. ���I then asked that suit be filed to prevent the payments,��� he added, though the step wasn���t taken after legal advice. The central bank���s legal staff counseled against litigation because punitive damages could be awarded if the suit failed.

Lawmakers called the top two US finance officials to Capitol Hill amid public outrage over the $182.5 billion federal bailout of AIG. The New York-based insurer paid the $165 million in bonuses to employees of the division that triggered the rescue with losses on credit-default swaps less than two weeks after reporting a $61.7 billion fourth-quarter loss on March 2.

���We did not think it was legally permissible��� to overrule AIG���s decision to pay bonuses, New York Fed President William Dudley also testified to the House panel. Geithner told the panel he found the bonuses ���deeply troubling��� when he found out about them March 10.

���I share the anger and the frustration of the American people, not just about compensation practices at AIG and in other parts of our financial system, but that our system permitted a scale of risk-taking that has caused grave damage to the fortunes of all Americans.��� Geithner also said the regulatory system must be fixed after it failed to rein in excesses at AIG.