In his opening statement, Fed Chairman Ben Bernanke made the case for legislation–soon to be introduced by the administration on the hill–that would create guidelines and authority for the government to take non-bank financial institutions (like, say, Lehman Bros. and AIG) into conservatorship or receivership. Bernanke said:
The decision by the Federal Reserve on September 16, 2008, with the full support of the Treasury, to lend up to $85 billion to AIG should be viewed with this background in mind. At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG. Unfortunately, federal bankruptcy laws do not sufficiently protect the public’s strong interest in ensuring the orderly resolution of nondepository financial institutions when a failure would pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures. However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as central bank to maintain financial stability. We took as collateral for our loan AIG’s pledge of a substantial portion of its assets, including its ownership interests in its domestic and foreign insurance subsidiaries. This decision bought time for subsequent actions by the Congress, the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.
Geithner said much the same in his own opening statement. That’s the line from the administration. What this means for AIG, but also existing banks and other financial institutions is still an open question. Let’s see if Geithner or Bernanke or William C. Dudley (President and Chief Executive Officer of the New York Fed, also testifying) tip their hands.