One of the key issues a House-Senate panel reconciling different versions of financial services reform will have to address is the powers of an authority that would be created to liquidate failed large financial firms, including insurers.
The issue came up June 26 at a hearing on American International Group convened by the Congressional Oversight Panel on the Troubled Asset Relief Program.
In discussing AIG–a prime inspiration of the need for a resolution authority–Elizabeth Warren, chairman of the panel, called AIG “a corporate Frankenstein.”
AIG was “a conglomeration of banking and insurance and investment interests that defied regulatory oversight and that would not have fit easily into the existing bankruptcy structure,” Warren said.
She said its complexity, its general significance and the fragile state of the economy may all arguably have been reasons for unique treatment.
“But no matter the justification, the fact remains that AIG’s rescue broke all the rules, and each rule that was broken poses a question that must be answered,” she said.
The Senate bill would create a Resolution Authority housed in the Federal Deposit Insurance Corporation. Firms placed under it would be liquidated without use of taxpayer dollars.
The original Senate proposal would have created a pre-funded system paid for by assessing financial firms with $50 billion or more in assets.
This approach was opposed by the American Council of Life Underwriters, whose opposition played a role in the decision to drop the pre-funded system and replace it with an assessment on all financial institutions with assets of $50 billion or more.