WASHINGTON – The Federal Reserve is working closely with other regulators to put into effect the most sweeping overhaul of U.S. financial rules since the Great Depression, Fed Chairman Ben Bernanke is telling a Senate panel.
The new law, enacted in July, toughens government oversight of Wall Street and banks, provides stronger protections for consumers and gives the Fed and other regulators new powers to restrain risky financial practices. It's aimed at preventing another financial crisis like the one that struck with force two years ago and plunged the country into a deep recession.
Bernanke was scheduled to testify at a hearing Thursday by the Senate Banking Committee. Appearing with him are Deputy Treasury Secretary Neal Wolin; Mary Schapiro, chairman of the Securities and Exchange Commission; Sheila Bair, chairman of the Federal Deposit Insurance Corp., and Gary Gensler, chairman of the Commodity Futures Trading Commission.
Their agencies are charged with writing scores of new rules to put meat on the bones of the overhaul law. As sweeping as the law is, Congress left much of the substance of the new rules to the discretion of regulators. The rule writing, just underway, already has drawn intense lobbying from financial industry interests.
Bernanke, Treasury Secretary Timothy Geithner and the other regulators are members of the Financial Stability Oversight Council, a powerful assembly created by the new law. The council is headed by Geithner and is charged with keeping watch over the entire system.
In his testimony prepared for Thursday's hearing, Bernanke said the Federal Reserve is working with the Treasury Department to develop ways for regulators to best detect financial dangers that could damage the economy. And the Fed is helping Treasury identify companies that are so big and so interconnected that their failure could take down the entire financial system. Those companies — which are likely to include Wall Street firms, big hedge funds and insurance companies — would be subject to tougher regulations.
The law includes a process for shuttering big, complex financial companies using money from investors and loans from Treasury.
At the same time, the Fed is transferring many of its consumer protection responsibilities to a new watchdog agency created by the law. The Bureau of Consumer Financial Protection is housed within the Fed and bankrolled by the Fed, but Bernanke has no authority over it.
All told, the Fed has identified 250 projects associated with the law. A new position was created to coordinate all those projects, Bernanke said. To be more open, the Fed will post information on its website about its communications with banks, trade associations, academics, consumer groups and others regarding the writing of new rules under the law.
NEW YORK – AIG, which reportedly is close to a deal that would allow the U.S. government to exit its ownership interest, says it will sell its two Japanese life insurance units to Prudential Financial Inc. for about $4.2 billion in cash.
The transaction also includes $600,000 in third-party debt, bringing its total value to approximately $4.8 billion, AIG said Thursday.
The sale, which is expected to close in the first quarter, includes AIG Star Life Insurance Co. and AIG Edison Life Insurance Co. and is part of AIG's plan to repay government bailout money. AIG will take a third-quarter charge of about $1.2 billion related to the sale.
"(The units') strength and potential generated significant interest in the capital markets, and given our obligations to the U.S. government, AIG had to consider any resulting bids carefully," CEO Robert Benmosche said in a statement.
AIG was one of the hardest hit financial companies by the credit crisis and received an aid package worth as much as $180 billion. The Wall Street Journal reported Thursday that AIG and federal overseers are finalizing a plan that would allow the insurer to eventually exit from U.S. ownership.
Treasury Department officials couldn't immediately be reached for a comment.
AIG Star and AIG Edison offer life, medical and annuity products to individuals and groups. Prudential Financial said the transaction will not affect customers' policies or rights.
"The addition of these operations to our existing businesses in Japan will increase our presence and give us opportunities to provide our quality service to more customers," Prudential Financial Chairman and CEO John Strangfeld said in a statement.
While AIG is selling the two divisions, the company based in New York said it will still keep and expand its Japanese general insurance business.
BRUSSELS – The finance ministers of the 16 countries that use the euro gathered Thursday to debate new rules that would crack down on overspending governments — but disagreements over key elements meant quick consensus seemed unlikely.
On Wednesday, the European Commission published a set of proposals it hopes will prevent another government debt crisis like the one that that nearly bankrupted Greece earlier this year and raised questions about the very future of the euro currency itself.
One of the key proposals would force countries to set aside 0.2 percent of their gross domestic product if they run up too much debt. The amount does not sound like much but could run into billions, depending on the size of the country.
The penalties are aimed at keeping government deficits at or below 3 percent of GDP.
The Commission wants a more "rules-based" approach to stop politicians all round Europe balking about reprimanding their partners. Under the previous set of rules, EU countries never gathered the will to fine each other when they ran budget deficits that broke the limits.
This inability to rein in government spending came into sharp relief when it took a last-minute euro110 billion ($140 billion) bailout in May from the International Monetary Fund and eurozone nations to keep Greece from defaulting on its government debt.
While most governments agree that the old way failed and needs to be strengthened, there's disagreement on who should have the power to impose the sanctions and whether fines should take effect almost automatically unless governments specifically vote against them.
France is among those opposed to handing over more power to unelected bureaucrats in Brussels.
Though French Finance Minister Christine Lagarde agreed Thursday that it was a "good idea to reinforce the pact," she has not commented about the Commission's proposals — perceived as a sign that she is wary of automatic fines — and has voiced her unease about politicians losing their input.
Luxembourg's prime minister Jean-Claude Juncker also raised questions as he headed to the meeting of eurozone finance ministers, along with Lagarde.
Juncker, who is also head of the eurogroup of finance ministers said the proposals were going in "the right direction" but noted that there were details that still need to be discussed.
"Those have been mentioned by Lagarde," said Juncker. "These are real problems."
There are a number of other issues on the table as finance ministers meet over the coming two days — later Thursday, the eurogroup will be joined by their counterparts from the rest of the EU.
Top of the agenda is likely to be the Irish government's decision to take majority control of Allied Irish Banks and pump billions more into two smaller banks as it seeks to stabilize the country's financial system.