In a March 27 article, the Associated Press reported on Republican opposition to Treasury Secretary Timothy Geithner's proposal for Congress to pass legislation allowing the federal government to take over failing nonbank financial institutions, without noting that House Republicans have themselves proposed giving the federal government authority to take over financial institutions.

The article reported that Geithner's plan “is drawing instant opposition from Republican lawmakers.” It later added: “The administration sent Congress a bill calling for the expanded powers to seize control of nonbank institutions late Wednesday. ... Republicans wondered whether the overhaul would give federal regulators too much power. 'Forgive me if I am a skeptic ... when I hear that if we only have a systemic regulator it will never happen again,' Rep. Scott Garrett, R-N.J., told Geithner.” But the article did not note that in the budget blueprint that House Republicans released on March 26, they proposed “a process to address insolvent institutions that stops throwing good money after bad into failing institutions and places insolvent ones into temporary receivership.”

In prepared remarks for his March 24 testimony to the House Financial Services Committee, Geithner stated: “The Administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context,” including the ability for the government to act “as a conservator or receiver”:

As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can. The Administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context.

The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, purchase its obligations or assets, assume or guarantee its liabilities, and purchase an equity interest.

The U.S. government as a conservator or receiver would have additional powers to sell or transfer the assets or liabilities of the institution in question, renegotiate or repudiate the institution's contracts (including with its employees), and prevent certain financial contracts with the institution from being terminated on account of the conservatorship or receivership.

This proposed legislation would fill a significant void in the current financial services regulatory structure with respect to non- bank financial institutions. Implementation would be modeled on the resolution authority that the FDIC has under current law with respect to banks.

Before taking any emergency action, the Treasury Secretary would need to determine that resolution authority is necessary upon the positive recommendations of the Federal Reserve Board and the appropriate federal regulatory agency.

Likewise, the House Republican budget blueprint -- signed by House Minority Leader John Boehner (R-OH) and several other members of the House Republican leadership -- states that “our plan supports a process to address insolvent institutions that stops throwing good money after bad into failing institutions and places insolvent ones into temporary receivership”:

Republicans believe the best antidote for market turmoil is certainty and economic growth. We oppose the trend toward national ownership and control of financial institutions. The government's interventions to date have generated market uncertainty and an aversion to private lending and investment. The government's strategy needs to minimize government interference in the management of companies and provide a clear exit strategy.

The Republican budget ends this failed bailout strategy by refusing to assume additional spending for bailouts. In addition, our plan supports a process to address insolvent institutions that stops throwing good money after bad into failing institutions and places insolvent ones into temporary receivership. Our plan would first perform a thorough stress test to determine whether a financial institution is healthy, troubled, or insolvent. For troubled firms, some portion of the firm's toxic assets would be insured, but such insurance would be self-financed by the industry itself in the form of premiums. For insolvent firms, either the FDIC or a Resolution Trust Corporation-type entity would restructure these firms in receivership by selling off their assets and liabilities, reappointing private management, while protecting depositors -- a process that builds off of Washington Mutual's arranged sale last year.

From the March 27 AP article:

The Obama administration's aggressive plan for strict scrutiny of hedge funds and other freewheeling investors, part of the biggest expansion of financial restraints since the Great Depression, is drawing instant opposition from Republican lawmakers and the rules' targets. And skeptics are questioning whether the new rulebook would work anyway.

Wall Street wizards have proved adept at designing complex financial products to sidestep existing regulations. And Vincent Reinhart, former director of monetary affairs at the Federal Reserve, says, “You're going to see firms try to figure out how to be under the radar.”

For example, private equity investors might try to buy large hedge funds and chop them into funds that would be small enough to operate unregulated, Reinhart said.

Treasury Secretary Timothy Geithner, unveiling the plan Thursday, said the nation's economic crisis demands bold action.

“We need much stronger standards for openness, transparency and plain commonsense language throughout the financial system,” he told the House Financial Services Committee.

The administration's proposals, which require congressional approval, include:

_ Imposing tougher standards on financial institutions that are judged to be so big that their failure would threaten the entire system.

_ Extending federal regulation for the first time to all trading in financial derivatives _ exotic instruments such as credit default swaps that are blamed for much of the economic carnage.

_ Requiring larger hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the Securities and Exchange Commission.

_ Creating a regulator to monitor the biggest institutions. Geithner did not say which agency should wield such authority, but the administration is expected to favor the Federal Reserve.

_ Empowering the government to take over major nonbank financial firms such as insurers and hedge funds if deemed necessary.

[...]

The administration's plan also includes a provision that Geithner and Federal Reserve Chairman Ben Bernanke discussed before the committee on Tuesday: to give the administration expanded powers to take over major nonbank financial institutions, such as insurance companies and hedge funds.

That power is aimed at preventing a repeat of the problems surrounding insurance giant American International Group Inc. AIG sparked a furor with news that it had distributed $165 million in bonuses to its financial products group. That unit specialized in trading credit default swaps, the derivatives that drove the company to near-collapse last fall.

The administration sent Congress a bill calling for the expanded powers to seize control of nonbank institutions late Wednesday. Frank has said this measure could win approval within weeks. And he said the administration's broader regulatory overhaul could win House approval by summer.

But Republicans wondered whether the overhaul would give federal regulators too much power.

“Forgive me if I am a skeptic ... when I hear that if we only have a systemic regulator it will never happen again,” Rep. Scott Garrett, R-N.J., told Geithner.