March 24 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner will call for expanded government powers to deal with failing non-bank financial institutions such as American International Group Inc., an administration official said.

Geithner, who testifies today before the House Financial Services Committee on AIG’s rescue, is expected to focus on the need for new tools for financial institutions other than banks, similar to those that the Federal Deposit Insurance Corp. has for winding down failed lenders and insuring consumer bank deposits, the official said.

The authority would allow the Treasury, in collaboration with the Federal Reserve, regulators and the president, to step in and more easily combat problems at systemically important institutions on the verge of failure, said the official, who spoke on the condition of anonymity. AIG has received $182.5 billion in government bailout funds, according to the Government Accountability Office.

“We must ensure that our country never faces this situation again,” Geithner is expected to say according to excerpts of his testimony obtained by Bloomberg News. “To achieve that goal the administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision.”

The expanded powers, which require Congressional approval, could help monitor risk and detect problems across an array of financial-services firms to prevent shocks to the global economy such as the one caused by the collapse of Lehman Brothers Holdings Inc. in September.

Taxpayer Funds

It would also ensure proper accountability when taxpayer funds are provided to institutions in extreme circumstances, like AIG, which is now 80 percent owned by the government. The authority would provide the government with various tools including the ability to break contracts on executive compensation commitments, like those at the center of the furor over the insurance-giant’s $165 million in bonuses.

Regulators should be able to safeguard the entire financial system as well as monitor the health of specific institutions, Geithner said. This oversight should cover “all institutions and markets that could pose systemic risk” he said, according to the excerpts.

President Barack Obama has made regulatory reform a central component of his economic agenda in an effort to combat the worst financial crisis since the Great Depression. Geithner will speak about the effort more broadly when he testifies again before the committee on March 26.

Systemic Risk

A key element of Obama’s financial regulatory overhaul is expanding government powers to deal with systemic risk, which under the resolution authority also addresses the politically explosive issue of bonus compensation at troubled institutions.

The president tasked his economic team to come up with an outline that he’ll take to London next week for a summit of the Group of 20 industrial and developing nations, where regulatory reform will be a major topic of discussion.

The resolution authority would send a signal to the international community that the U.S. is working to address the global systemic risks posed by non-bank financial institutions that are in imminent danger of bankruptcy, administration officials said. The federal government’s responses last year to the impending bankruptcies of Bear Stearns, Lehman Brothers and AIG were complicated by the lack of a regulator to help wind down such institutions that aren’t regulated by the FDIC.

Bear Stearns Sale

The Federal Reserve and the Treasury Department forced the sale of Bear Stearns Cos. to JPMorgan Chase & Co. a year ago to prevent its collapse. Lehman Brothers filed the biggest bankruptcy in September after the government declined to step in.

“It would allow us proactively to get out in front, make sure that we’re separating out bad assets from good, dealing with contracts that may be inappropriate, and preventing the kinds of systemic risks that we’ve seen taking place with AIG,” Obama, 47, said last week.

Under the expanded resolution authority, the new rules would be subject to a formal process for deciding when and how they can be used. The Treasury Secretary would have the authority to act only after consulting with the president and upon recommendation of two-thirds of the Federal Reserve Board, the official said.

Among other actions to resolve failing non-bank institutions that pose risks to the global financial system, Geithner will ask for the ability to establish a conservatorship or receivership for at-risk firms.

Lax Oversight

Like the White House, Congress is trying to overhaul U.S. financial regulations and agencies that lawmakers have faulted for lax oversight. Barney Frank, the chairman of the House Financial Services Committee is playing a lead role in the redesign, and has been pushing to expand the Fed’s authority with a systemic-risk regulator.

Geithner’s proposal today is expected to only focus on the resolution authority and not a separate systemic-risk regulator, such as the one for which Frank, a Massachusetts Democrat, has been calling.

While other lawmakers, including Senate Banking Committee Chairman Chris Dodd and Senator Richard Shelby, the panel’s top Republican, have endorsed the idea of creating a systemic-risk regulator, they’ve been reluctant to expand the Fed’s role, faulting the central bank for lapses leading to the financial crisis.

Legal Mechanism

FDIC Chairman Sheila Bair last week called on Congress to create a “legal mechanism” to unwind “systemically important” institutions as lawmakers consider options for overhauling U.S. financial rules in Washington.

“The differences in outcomes from the handling of Bear Stearns and Lehman Brothers demonstrate that authorities have no real alternative but to avoid the bankruptcy process,” Bair said at a Senate Banking committee hearing. “Having a mechanism for the orderly resolution of institutions that pose a systemic risk to the financial system is critical.”

She said that the FDIC, if given additional rulemaking authority, was “prepared to take on an expanded role in providing consumers with stronger protections that address products posing unacceptable risks to consumers and eliminate gaps in oversight.”

To contact the reporter on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.netRebecca Christie in Washington at Rchristie4@bloomberg.net;

Last Updated: March 24, 2009 03:19 EDT