WASHINGTON (AP) - Treasury Secretary Timothy Geithner said Monday that the severe banking crisis shows the U.S. financial system failed a major test and is in need of an overhaul.
Geithner told a Washington conference that the Obama administration plans to work with Congress to put in place a stronger, more stable system with a modernized government regulatory structure.
"Our system basically failed its most fundamental test," he said in remarks to a conference sponsored by the Wall Street Journal. "It was too fragile."
Geithner will appear with Federal Reserve Chairman Ben Bernanke on Tuesday before the House Financial Services Committee which is examining the government's handling of the bailout of troubled insurance company American International Group Inc.
AIG last week sent off a firestorm of criticism after it paid $165 million in bonuses. The House overwhelmingly passed legislation to tax those bonus payments at up to 90 percent, though President Obama has questioned the bill on constitutional grounds.
Lawmakers had argued the employees who received the payments worked for the AIG division that drove the company nearly to collapse with risky trades in credit default swaps and should not be getting bonuses after the government was forced to plow more than $180 billion into AIG to keep it afloat.
A Treasury official said Geithner, who has come under criticism for not doing enough to stop the bonus payments, will use his appearance before the panel Tuesday to explain a key part of the administration's reform agenda.
The official, who spoke on condition of anonymity in advance of Geithner's testimony, said he would "focus on the need for the government to address companies and markets that pose systemic risks to our financial system, ensuring that we close the gaps in the regulatory framework and that we never have to face situations like AIG again."
The administration will urge Congress to grant it the authority to take over major troubled instutions whose collapse is judged to pose a threat to the entire financial systmem.
The administration would have the power to limit payments to creditors and to break contracts for executive bonuses, the issue that raised the furor with AIG.
In his appearance Monday night, Geithner said it was critical that the government make the needed reforms.
"The world is watching us to see if we have the will and ability to fix this," he said.
He called it a "terrible, tragic thing" that the country did not have better tools such as the power to take over major institutions when the crisis hit with force last fall.
The administration is unveiling its proposals on regulatory reform a week before President Barack Obama goes to London for a meeting on April 2 of the Group of 20 major industrial and developing nations.
At the G-20 meeting, the United States is expected to be pressed to unveil tougher regulatory proposals. Other nations have blamed lax regulations in the United States for setting the stage for the current meltdown of the global financial system.
The Obama administration has said it will keep pressing countries to follow the U.S.'s lead and do more to jump-start economic growth with major stimulus spending.