Treasury Secretary Timothy F. Geithner wants to create an independent regulator charged with ensuring that the companies involved in today's complex financial transaction don't ever bring the economy crashing down again.
Among the targets for reform in his plan unveiled today: credit default swaps and other types of derivatives that have been blamed for exacerbating the economy's troubles. And hedge funds, which have become important market players in the last few years, would now be required to register with the Securities and Exchange Commission.
One of the prime concerns is that some of these companies are so interconnected with the rest of the economy that if they fail, the domino effect could topple the entire financial system. That was the fear with AIG and Bear Stearns and Geithner hopes that the new regulator would be able to control that systemic risk.
Geithner outlined the plan in testimony today before the House Financial Services Committee, his second appearance in three days before the panel.
Geithner said that Wall Street and the financial system have "failed in basic fundamental ways."
"The system proved too unstable and fragile, subject to significant crises every few years, periodic booms in real estate markets and in credit, followed by busts and contraction," he said. "Innovation and complexity overwhelmed the checks and balances in the system. Compensation practices rewarded short-term profits over long-term return."
To fix the system, Geithner said the government can't just make "modest repairs at the margin," but must write "new rules of the game."
"We can't allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints," he said.
There was a push from some Geithner and some members of the committee to act now, while the economy was suffering and there is public support for reform.
"Too big to fail is the right size to regulate," said Rep. Al Green, D-Texas. "It is time for us to act."
"When we have this opportunity to make a difference there will be naysayers. We need naysayers … but we cannot allow the naysayers from allowing us to do what we know is the right thing for the American people," Green added. "Mr. Secretary I salute you for what you are doing. God bless you."
Geithner thanked him for the comments and then reiterated: "We have an opportunity now and we need to act."
Not everybody was so enthusiastic.
"This empowers federal regulators with incredible discretion," warned Rep. Spencer Bachus, R-Alab., the committee's ranking member.
Rep. Scott Garrett, R-N.J., cautioned that with a resolution authority in place, "We could really end up doing a heck of a lot more harm than good", adding "Forgive me if I'm still a skeptic."
"You realize how radical your proposal is?," asked Rep. Don Manzullo, R-Ill. in the day's most contentious exchange, just minutes before the hearing ended.
"It's not a radical proposal," Geithner replied.
"Oh, it's absolutely a radical proposal!" exclaimed Manzullo. "You're talking about seizing private businesses and you don't consider that to be radical?"
Rep. Joe Donnelly, D-Ind., asked why the government should allow Wall Street to produce certain types of investment vehicles.