Geithner calls for comprehensive regulatory reform

By Caitlin Taylor

Mar 24, 2009 7:49am

ABC News’ Matt Jaffe & Rick Klein report:

Treasury Secretary Tim Geithner Tuesday will ask for new regulatory powers for the federal government to address financial institutions whose failure could threaten the stability of the nation’s financial system.

"This is an extraordinary time and the government has been forced to take extraordinary measures," Geithner says in an excerpt of his prepared testimony for this morning’s House Financial Services Committee hearing. "We will do what is necessary to stabilize the financial system and, with the help of Congress, develop the tools that we need to make our economy more resilient and our system more just…"

"We must ensure that our country never faces this situation again. To achieve that goal, the Administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision," he is expected to state. "All institutions and markets that could pose systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking. Regulators must apply standards, not just to protect the soundness of individual institutions, but to protect the stability of the system as a whole."

Today’s hearing will focus on AIG, the embattled insurance giant that has received over $170 billion in government bailout funds. A "resolution authority", the administration believes, would have enabled the government to intervene with AIG to prevent the current predicament.

The new resolution authority would give the government the ability to sell or transfer assets and components of a company. The government would have the power to renegotiate or dissolve executive compensation deals, as well as deal with risky derivatives portfolios. The goal is to make sure the country never has to confront a situation like AIG in the future.

Geithner has been vocal in recent weeks about the need for more tools to protect the nation’s economy.

"It’s a terrible, tragic thing that this country came into this crisis with such limited tools for trying to protect the economy itself from the kind of distress that’d come as the system came back down to Earth," Geithner said Monday night at the Wall Street Journal’s Future of Finance Initiative in Washington.

"Our system basically failed its most fundamental test," he stated. "It was too fragile. It was too vulnerable to shocks. It did not adequately put in place a set of checks and balances on risk-taking that had systemic consequences. You had failures in consumer protection at the basic level cause grave systemic consequences for the system as a whole. And we have a great obligation to get this right." 

"I mean, the world is watching us," he noted. "They’re looking at what happened in our markets. And we have got to figure out — we have got to get ourselves to the point where we put in place a stronger, more stable system that provides a better balance between efficiency and stability. We just have not gotten that balance right. And we have a great obligation as a country to move to try to restore that."

Geithner said Monday that the government has the opportunity to turn the nation’s frustrations with the current crisis into implementing an improved regulatory framework.

"You want to take that frustration and channel it to a credible reform agenda that people can look at and say, "That has the prospect of producing a more stable system," that preserves capacity for innovation, still does what our markets do better anywhere in the world, which is we still have the system that does the best job in the world of taking the savings and investments of people around the world and channeling them to help finance putting an idea into a growing business. We are excellent at doing that."

"Our judgment is that that the credible solution is going to have to have a bunch of elements," he said, previewing the government’s plans. "We’re going to have to bring a stronger form of basic oversight with better designed constraints on leverage applied to those institutions whose stability is really critical to the functioning of the system. We’re going to have to bring a better oversight framework over the markets that are so critical to how the system works."

The financial regulatory reform framework is the latest in a series of sweeping moves made by Geithner and the Treasury Department to address the current crisis and prevent future ones. On Monday, he unveiled the administration’s plan to rid banks of the toxic assets weighing down their balance sheets, a move that sent the markets soaring by almost 500 points, the fifth biggest gain in history.

- Matt Jaffe & Rick Klein

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