Spiraling anger over the bailout and bonuses of American International Group Inc. (AIG), has brought to head the issue of regulatory power when it concerns large financial institutions that are not necessarily deposit-taking institutions insured by the government. The issue was taken up by the Obama administration Tuesday, when it began a full-fledged effort to expand the federal government’s power to seize control of any troubled financial institution deemed systematically important to the livelihood of the nation’s financial system. The federal government has long had the power to take over and close banks and other deposit-taking institutions whose deposits are insured by the government and therefore subject to detailed regulation. But currently, “there is no effective legal mechanism to unwind a non-bank financial institution like AIG,” said Treasury secretary Timothy Geithner in a testimony before the House Financial Services Committee Tuesday. The Obama administration and the Fed see an immediate need to extend the government’s regulatory authority to insurance companies like A.I.G., hedge funds, investment banks, private equity firms and other financial institution considered “too big to fail.” “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 said. The Treasury said Wednesday that new legislation — granting additional tools to address “systemically significant financial institutions” that fall outside of the current resolution regime under the FDIC — will be sent to Congress this week. According to a statement by the Treasury, the legislation would allow the government to put a firm — considered by the Treasury and FDIC as requiring emergency measures — into conservatorship or receivership and then to administer its reorganization or wind-down. Critics Critics question whether the Fed should play the decision-making role, instead of the Treasury and FDIC. The Treasury said the bill would also reduce the need for taxpayer funds by enabling the federal agency as a conservator or receiver to sell or transfer the assets or liabilities of the institution in question, renegotiate institution’s contracts and address the company’s derivatives portfolio, hopefully reducing the potential for further disruption. “It is precisely because of the lack of this authority that the A.I.G. situation has gotten worse,” Obama explained in a news conference Tuesday evening, where he also said the government could have handled the AIG bailout more effectively had it had the same power to seize large financial institutions as it did to take over failed banks. The Treasury and the Fed each submitted their own proposals to the House Financial Services Committee on Tuesday, and President Obama urged Congressional leaders to act quickly on the legislation. House Democrats said they hoped to bring a bill to the House floor within the next several weeks, according to a report by the New York Times. If the measure passes, it would represent one of the largest permanent expansions of federal regulatory power in years, but Obama suggested Tuesday evening there would likely be “strong support” from the American people and Congress to grant the proposed authority. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.