Geithner urges quick action on regulation
WASHINGTON -- Lawmakers on Thursday broadly supported action to fix the nation's financial regulatory system, but cautioned that rushing the changes could do more harm than good.
At a hearing before the House Financial Services Committee, Treasury Secretary Timothy Geithner laid out the Obama administration's proposals to overhaul the nation's tangled web of financial regulation, including creating a watchdog to look over big, interconnected firms.
He asked Congress to move quickly, and members generally agreed that changes are needed — strong enough to prevent another financial meltdown while not impeding capitalism.
But a number of lawmakers argued for careful deliberation.
"In our rush to save our economy, we certainly don't want to suffocate it," said Rep. David Scott, D-Ga.
"The details are important," said Rep. Spencer Bachus, R-Ala. "Even more important is that we develop the right solution and not rush to poorly vetted legislation."
Geithner asked that Congress move "as quickly as you can," arguing the United States is "still in the midst of a very challenging period" and the government needs more tools to respond.
"This will be less costly for the economy, less costly for the taxpayer, if we're able to contain this more effectively," he said, arguing for a better "firebreak" to contain the damage.
Geithner laid out a six-step proposal to strengthen the regulatory system:
• Creation of an independent body with oversight over "systemically important" firms — large, interconnected financial companies whose downfall could have a broad ripple effect through the economy, like Lehman Brothers and AIG. Geithner also discussed the need for oversight of various government agencies to make sure there are no gaps or differences in regulation.
• Requiring firms that considered systemically important to meet more stringent requirements, such as the amount of capital they hold.
• Giving the administration authority to take over failing, non-bank financial firms just as the Federal Deposit Insurance Corp. can take over failing banks in an orderly fashion.
• Toughen regulations for money market funds to reduce the risk of rapid withdrawals by nervous investors. Money market funds are considered extremely safe investments, and are frequently used by investors to park money when moving between investments. But last year's collapse of the Reserve Fund shook investors' faith in money funds, and forced the government to implement a temporary insurance program to restore confidence.
• Regulate credit default swaps and other derivatives. These instruments are designed to protect investors against default of corporate bonds, subprime mortgages and other financial products. They have been cited as a major reason for the downfall of AIG, which found itself unable to pay investors when last year's credit-market freeze led to a sharp rise in defaults.
• Require large hedge funds, pools of private investment money used by wealthy investors and institutions, to register with the government.
While both Democrats and Republicans expressed support for the administration's approach, there was criticsm.
Some lawmakers, such as Rep. Scott Garrett, R-N.J., expressed concern that by identifying firms as being systemically important, they could be considered to be too big to fail. That could lead investors to take additional risks in those firms, assuming the government would step in to prevent a failure.
"We could really end up doing a heck of a lot more harm than good," Garrett said.
Bachus said the proposal to give the government the power to take over and unwind failing firms put too much of a burden on taxpayers. American Bankers Association president Edward Yingling said he has "serious concerns" about giving that power to the Federal Deposit Insurance Corp., as has been proposed.
"The FDIC has spent 75 years developing a rock-solid reputation for unequivocally standing behind bank deposits," Yingling said in a statement. "That reputation could be lost easily and be hard to rebuild if the FDIC brand is extended beyond bank deposits. … Imagine the public's confusion regarding deposit insurance today if a non-bank like AIG had been placed in the FDIC's hands for resolution."
And several lawmakers questioned that, given the global nature of the financial system, if the United States took more restrictive action than its counterparts abroad, investors would move their money elsewhere.
Geithner said the USA has to work with its trading partners, but, "we dont want to leave our country vulnerable" while a global financial framework is being crafted.
"The new rules must be simpler and more effectively enforced and produce a more stable system ... that is able to adapt and evolve with changes in the financial market," Geithner said.
The goal is to repair a system that has proven "too unstable and fragile," he said.
"Let me be clear," Geithner told the committee. "The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers must end."
The administration, pushing for quick action on its reform agenda, sent Congress a 61-page bill dealing with the expanded powers to seize control of non-bank institutions late Wednesday.
The House committee, chaired by Rep. Barney Frank, has indicated it could move on the measure as early as next week.
However, it was unclear how fast the rest of the financial reform agenda might move through Congress. Geithner on Thursday provided only a broad outline of the other proposals. Many thorny details will need to be worked out.
Administration officials promised that the remaining issues would be hammered out in consultation with Congress with the goal of getting legislation approved as quickly as possible.
The administration wants hedge funds and other private pools of capital, including private equity funds and venture capital funds, to be required to register with the SEC if their assets exceed a certain size. The threshold amount has yet to be determined.
The proposal on credit default swaps and other derivatives would require the markets on which they are traded to be regulated for the first time, and for the buying and selling of these instruments to be conducted in ways that will enable greater oversight.
Credit default swaps, which trade in a $60 trillion global market without government oversight, are contracts to insure against the default of financial instruments like bonds and corporate debt. They played a prominent role in the credit crisis that brought the downfall of investment banking giant Lehman Brothers Holdings last fall and nearly unraveled AIG, forcing the government to provide more than $180 billion in support.
Hedge funds, vast pools of capital holding an estimated $1.5 trillion in assets, operate mostly outside government supervision. As the market crisis deepened last fall, hedge fund selling was widely cited as one of the reasons for increased volatility that pounded stocks and bonds. Hedge funds also suffered huge losses last year, notably from investments in securities tied to subprime mortgages.
Requiring hedge funds to register would open their books to inspection by regulators. The SEC sought that authority several years ago but was stymied by a federal appeals court in 2006.
Hedge funds have grown explosively in recent years while operating secretively. They have lured an increasing number of ordinary investors, pension funds and university endowments — meaning millions of people now unwittingly invest in hedge funds indirectly.