Fed, Treasury chiefs face questions on bank rescue

The Federal Reserve chairman and the secretary of the treasury make a rare joint appearance at a congressional hearing Tuesday where lawmakers were expected to press them on the new risks to taxpayers from their latest effort to save tottering banks.

Fed chief Ben Bernanke and Treasury Secretary Timothy Geithner were also likely to take a scolding over the handling of bonuses to executives at AIG, the giant insurance company that has become the symbol of reckless risk-taking on Wall Street.

But after venting their anger yet again at a House hearing Tuesday, lawmakers were expected to question Bernanke and Geithner on the plan announced a day earlier to take over up to $1 trillion in dodgy mortgage securities with the help of private investors in an effort to unclog the nation's credit system.

At the same time, Bernanke and Geithner are likely to once again call on Congress to enact legislation that would allow the government to safely dismantle a big financial institution, like American International Group Inc., to minimize any damage to the U.S financial system and the broader economy.

President Barack Obama last week said his administration soon will propose new financial industry oversight that includes a "resolution authority" with powers similar to those of the Federal Depoist Insurance Corp., which can seize control of failing banks, take over their bad assets and sell the good ones to competitors.

The proposal would give the treasury secretary the unprecedented power, after consulting with officials at the Fed, the U.S. central bank, 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 that backs bank deposits.

At Tuesday's hearing Geithner "will focus on the need for the government to address companies and markets that pose systemic risks to our financial system, ensuring that we close the gaps in the regulatory framework and that we never have to face situations like AIG again," treasury spokesman Andrew Williams said.

The toxic assets plan is a crucial part of the Obama administration's strategy to prop up banks and stabilize the financial system. If the bad assets are taken off banks' books, they will be in a better position to lend more freely to customers.

Under details released Monday, the plan will take $75 billion to $100 billion from the government's existing $700 billion financial-bailout pot. The government will pair this with private investments, mostly from institutional investors such as hedge funds, and loans from the FDIC and the Fed to generate $500 billion in purchasing power.

Geithner says purchases eventually could grow to $1 trillion _ roughly half of the estimated $2 trillion of toxic assets on bank books now.

The rescue plan was a huge gambit and one that came like a tonic to Wall Street, which had panned an earlier outline of the program by Geithner that lacked detail.

Stocks soared, the Dow Jones industrial average shooting up nearly 500 points, or 6.8 percent, thanks to the bank-assets plan and a report showing an unexpected jump in home sales.

Obama told reporters Monday his economic team was "very confident" the rescue plan would work.

The goal, Obama said, is to get banks lending again, so "families can get basic consumer loans, auto loans, student loans, (and so) that small businesses are able to finance themselves, and we can start getting this economy moving again."

Geithner counseled patience Monday, saying work to rehabilitate the banking and financial industry has to go forward despite "deep anger and outrage" over bad lending and investment practices.

Monday's announcement came ahead of a summit next week in London of 20 major and developing economies struggling with the global recession.

Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, some, particularly in Europe, are resisting calls for more stimulus funding and would prefer to see more internationally coordinated bank regulation.

The fleshed-out plan announced by Geithner is designed to help place a value on damaged mortgage loans and other toxic securities.

If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses.

"This will help banks clean up their balance sheets and make it easier for them to raise capital," Geithner said.

Obama, surrounded in the Cabinet room by leaders of his economic team, downplayed expectations for a quick fix.

"The good news is that we have one more critical element in our recovery," said Obama. "But we've still got a long way to go."

At the same time, Obama said the economy was beginning to show "glimmers of hope" in the housing market, where the bursting real estate bubble last year set in motion the financial crisis that nearly brought the system to collapse.

On Monday, banking officials praised the outlines of the program and expressed optimism that it will work.

"We are very supportive," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "We think it is a useful tool in the arsenal against liquidity problems."

Treasury officials had no firm forecast on when the government would begin making the asset purchases although market expectations were that the process could begin within weeks.

Geithner defended the decision to have the government carry so much of the risk. He said the alternative would have been to do nothing and risk a more prolonged recession or have the government carry all of the risk.

Geithner wrote in Monday's Wall Street Journal that the new bank program aimed to "resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer. ... Simply hoping for banks to work these assets off over time risks prolonging the crisis."

The treasury secretary has a lot personally tied to the success of the new program. Geithner's performance in the Cabinet, including his slowness in learning about multimillion dollar executive bonuses paid by AIG after taking bailout money, has been severely criticized by some in Congress.

AIG's decision to recently pay millions in bonuses has created a public relations headache for Obama at a time when he is trying to build public and political support for his ambitious budget proposal, bank-rescue plan and overhaul of the nation's regulatory structure to prevent future financial crises like the one now gripping the country.

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.

As a result, the government has bailed out AIG four times to the tune of more than $180 billion. 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 insurance company's near collapse last year. The bonuses came even as AIG reported a stunning $62 billion loss, the biggest in U.S. corporate history.

On Monday, New York state Attorney General Andrew Cuomo said that AIG employees have voluntarily agreed to returnabout $50 million of the $165 million in bonuses awarded earlier this month by the troubled insurer.

Government bailouts of AIG, Citigroup Inc., Bank of America Corp. and others have put billions of taxpayers' dollars at risk over the past year and angered the American public.

But Bernanke said last week that a failure of a huge, globally interconnected company would have had potentially devastating effects on the financial system. "I do not think we have had a realistic alternative to preventing such failures," he said.