The Why of Kabuki

The Washington Post reports that the Obama administration is seeking unprecedented powers to seize firms in order to protect the economy against ‘damage’.

The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document. The government at present has the authority to seize only banks. …

Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers. …

Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.

It’s fair to ask whether the supposed outrage over AIG bonuses did not have some beneficial value to making this argument. Although one hesitates to make the comparison with the Reichstag fire, it suggests itself. Perhaps the proposal has merits on its own, but I can’t see them; and even if they exist in principle, what about agency problem? Can anyone be trusted with so far reaching an authority?

Open thread.

Looks like Geithner may get the authority, too. Reuters reports that a senior Democrat is backing the move.

WASHINGTON (Reuters) – A senior Democratic lawmaker told Reuters on Tuesday that he was willing to give Treasury Secretary Timothy Geithner more authority to oversee the unwinding of financial institutions that are not now federally regulated.

U.S. Rep. Paul Kanjorski, chairman of a House Financial Services subcommittee, said Geithner would be asking for additional authority to oversee organizations like giant insurer American International Group.

Kanjorski said he would work with the Obama administration to give the Treasury Department the additional authority to handle such institutions “if there is a systemic problem involved.

“We can’t have entities like AIG going totally uncontrolled and unregulated when they have such a forceful effect on the economy,” Kanjorski added.

Geithner gets a deputy. Byron York writes:

Late Monday, the Obama White House announced it has finally found a candidate to become the number-two official at the Treasury Department under Secretary Timothy Geithner. Turns out he was in the White House all along.

Neal Wolin, a veteran of the Clinton Treasury Department who last month left his post at the Hartford Financial Services Group to become a White House economic adviser, will now become Deputy Secretary of the Treasury — if, that is, his various seven-figure bonuses and stock options from Hartford pass populist muster on today’s Capitol Hill.