Unprecedented Broadening of Federal Power

Alexander Hamilton, the First Treasury Secretary
Alexander Hamilton, the First Treasury Secretary



The Obama Administration and Treasury Secretary Timothy Geithner are making plans to request unprecedented power to take over companies that could cause a wider threat to the financial system.

In the aftermath of AIG, Bear Stears, and Lehman among others, the Administration feels it must have the power to step in and be able to liquidate a company in an orderly fashion before  it causes a system wide breakdown.  he authority would allow the government to sell or transfer assets and components of a troubled company, including renegotiating or dissolving executive compensation agreements and addressing risky derivatives portfolios, the officials said.

I generally agree with the concept, and actually thought that this is what should be done with AIG and others.  An orderly disassembling of these companies is the only way out.  I think the government should have a method to handle these companies defaulting.  That was the major problem that President Bush and Hank Paulson had; there was no legal construct to handle the onslaught of defaults of non-bank entities.

The problem again will be Constitutionality.  Geithner will call for regulators to apply standards not only to protect the financial health of individual institutions, “but to protect the stability of the system as a whole.”  What exactly does that mean?  In Russia, that means any company that displeases Vladamir Putin is challenging the system as a whole.  From what I can understand, there is no checks-and-balances on this system.  Once the President and the Treasury Secretary decide that a company is a threat, they can step in.  Congressional oversight would only come in the aftermath.

Whenever you hear politicians talk about ‘extraordinary measures’ as Geithner did with Congress today, you should get worried.  Again, the law of unintended consequences.  There should be some check on executive power if this proposal goes through, otherwise it is a major threat to the business community and, frankly, to our democracy.  A apolitical body, such as the FDIC, would be preferential than having a political appointee like the Treasury Secretary handling it.  A committee of numerous bodies also could lessen the probability of the misuse of these laws, which are necessary but dangerous.

Mr. Obama compared Mr. Geithner to Alexander Hamilton, the country’s first Treasury Secretary.  Hamilton was accused of being almost a monarchist, and a proponent of centralized executive power.  Funny, but Hamilton could only dream of the kind of power that Geithner is proposing.