WASHINGTON — The Obama administration is gearing up for an aggressive new push to regulate large financial corporations -- including insurance companies, hedge funds and private-equity firms -- that would wreak havoc on the nation's economy should they fail.
The move, led by Treasury Secretary Timothy F. Geithner, aims to reverse decades of deregulation that has allowed financial companies especially to operate without any significant federal oversight.
The effort was triggered mainly by increasing frustration over the government's inability to rein in firms such as bailed-out American International Group Inc., the giant insurer that has received federal commitments of as much as $182.5 billion because it was deemed too big to fail.
Under the proposal, the government for the first time broadly would regulate the market for complex financial instruments known as derivatives, the Washington Post reported late Wednesday. That market was the undoing of AIG, which lost tens of billions of dollars on contracts under which it agreed to insure investors against defaults on mortgage-backed bonds and other risky securities.
On Wednesday, Geithner disclosed general outlines of the initiative, the final piece of a multipronged attack to pull the country out of the deep recession and prevent a similar economic meltdown from happening again. He is expected to provide more information at a congressional hearing today.
The administration also wants to assure international allies that the U.S. is serious about calls for tighter rules and regulations over the financial system. Late next week, President Obama and leaders of the 20 largest economies will meet in London to work on a coordinated plan to deal with the global recession.
The goal of tighter regulation is "to help ensure that this country is never again confronted with the untenable choice between catastrophic financial risk and massive taxpayer bailouts," Geithner said in a speech Wednesday in New York.
"We came into this financial crisis as a country without the authority and without the tools we needed to contain the damage to the economy," Geithner told the Council on Foreign Relations. "We're moving now to ensure that we're equipped both in the future and as soon as possible with a more modern framework of regulation to . . . leave us less vulnerable to these kind of things in the future."
The Federal Reserve used extraordinary powers to lend $85 billion to AIG to keep it from failing in September, the first installment of what has become by far the largest government bailout of the financial crisis. Though Geithner's credibility has been damaged by the controversy over $165 million in retention bonuses given to AIG employees, he is trying to seize the initiative and use the problems of that bailout to highlight the need for regulatory changes and new government powers.
Geithner and others have noted that federal regulators have the power to seize failing banks and sell off their assets, but have no power to do so with non-banking financial companies such as AIG.
The attempt to tighten regulations and boost government power over the economy will touch off what could be months of high-stakes negotiations and lobbying. Geithner has said the regulatory overhaul would include attempts to address executive compensation, though he has not provided any details.
Key Democrats have signaled their support for granting the government power to seize and dismantle large financial institutions. That authority would be linked to new oversight of the economy for companies whose failure or activities pose so-called systemic risks.
"You need a systemic risk regulator," Sen. Charles E. Schumer (D-N.Y.) said. "And a systemic risk regulator doesn't just look. A systemic risk regulator, when there is systemic risk, has the power to intervene."
Sen. Bob Corker (R-Tenn.) agreed that the government needs the new power. But he expressed concerns about giving it to a political appointee, such as the Treasury secretary, instead of an independent government agency, such as the Federal Reserve or the Federal Deposit Insurance Corp.
Geithner's plan proposes that Treasury share the power with the two agencies. Corker and others want to give all the authority to the FDIC, which long has had authority to seize and unwind failed banks, as it did last year with IndyMac Bank in Pasadena.
"There's one thing we don't need to do is rush to judgment . . . and end up giving powers to people that could be used politically," Corker said. "I think to give an administration official, regardless of who the administration is, the ability to close down an entity, to me, raises some red flags."
When the FDIC seizes a failed bank, it makes the major decisions about how the bank is dismantled, including canceling employment contracts. Obama administration officials said they agreed to let AIG pay $165 million in retention bonuses this month because they feared employee lawsuits if the money were withheld.