AIG like companies will no longer be left unregulated

On Tuesday testifying before the Congress Obama’s administration proposed the lawmakers to create relevant regulation allowing the government to control non-bank financial institutions like AIG to evade the need in future bailouts not to speak of systemic risks, reports Reuters. U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke called upon Congress to provide corresponding legislation to take over big non-bank financial firms that run amok. President Barack Obama took the case public during a televised news conference.

"Keep in mind that it is precisely because of the lack of this authority that the AIG situation has gotten worse," Obama said. "We should've obtained it much earlier so that any institution that poses a systemic risk that could bring down the financial system, we can handle, and we can do it in an orderly fashion that quarantines it from other institutions."

Answering the question which agency will be eligible to take the responsibility Obama pointed to the Federal Deposit Insurance Corp as having a proper model for these purposes.

"If you look at how the FDIC has handled a situation like IndyBank for example, it actually does these kinds of resolutions effectively when it's got the tools to do it. We don't have the tools right now," Obama said.

While having the authority to disband failed banks like IndyMac Bank the FDIC has no power to wind down other types of financial firms. Geithner stressed that the government should have proper authority to deal with failing non-bank institutions that it already has to deal with struggling banks. His proposal comes to that the Treasury chief would determine whether emergency action was needed in consultation with the Fed and the relevant regulator.

The collapse of the AIG stems from its division dealing in derivatives contracts that has been likened to a hedge fund. When the U.S. housing sector crushed that unit was hit heavily which could have resulted in an absolute failure of the whole financial system.

"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," Geithner told the House of Representatives Financial Services Committee.

Meanwhile, proceedings to introduce amendments to the financial regulation have been already started by Congress. The feasible bill will likely include authority to wind down non-bank firms. The committee will reportedly vote on a new bill as soon as March 31.