WASHINGTON – Federal Reserve Chairman Ben Bernanke told Congress Tuesday he wanted to sue to stop insurance giant AIG from paying millions in bonuses, but was talked out of it.
He also said that a collapse of the global insurance giant could have caused a “global financial and economic meltdown.”
In testimony he prepared for the House Financial Services Committee, Bernanke also the bailout of the troubled insurance company underscored the urgent need for Congress to grant new powers to safely wind down financial giants on the verge of collapse and subject them to much stronger regulatory oversight.
On that point, Treasury Secretary Timothy Geithner, in testimony readied for the same hearing, asked lawmakers to give him powers similar to those of the Federal Deposit Insurance Corporation, which can seize control of banks, take over their bad assets and sell the good ones to competitors.
Bernanke and Geithner faced a scolding before the Financial Services panel over the handling of bonuses at American International Group Inc., which has become a symbol of reckless risk-taking on Wall Street.
Much of the discussion centered on ways to help the government better deal with future AIG-like companies whose failure could devastate the financial system and the drag down the economy.
Geithner made it clear he believes the treasury secretary should be granted unprecedented power, after consultation with Federal Reserve Board officials, to take control of a major financial institution and run it. The treasury chief is an official of the administration, unlike the FDIC, which is an independent regulatory agency.
AIG is a globally interconnected colossus, with 74 million customers worldwide and operations in more than 130 countries. The government decided it was simply too big to let fail.
“Its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs,” Bernanke told the panel.
As a result, the government has bailed out AIG four times, to the tune of more than $180 billion altogether. The company recently paid at least $165 million in bonuses to employees who worked in the financial products division that has been blamed for the its near-collapse. The bonuses came even as AIG reported a stunning $62 billion loss, the biggest in U.S. corporate history.
New York Attorney General Andrew Cuomo said Monday that 15 employees who received some of the largest bonuses from AIG have agreed to return them in full, totaling about $50 million.
Bernanke said it was “highly inappropriate to pay substantial bonuses” to the employees. Bernanke said he asked that the payments be stopped but was told that they were mandated by contracts agreed to before the government seized control of AIG on September 16.
“I then asked that suit be filed to prevent the payments,” he said. Legal staff counseled against this action on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail. AIG’s financial products division has a base in Connecticut.