Treasury Secretary Unveils Proposed Financial Rules
OVERHAUL
Norwalk Hour
Tait Militana
Boston University Washington News Service
03/26/09
WASHINGTON – Treasury Secretary Timothy Geithner unveiled a wide-ranging overhaul for regulating the country’s financial system Thursday that could give the government control over financial giants like the American International Group.
The proposals are in reaction to the banking crisis which has threatened the survival of financial institutions and wiped out trillions of dollars in investor wealth.
Geithner said the United States came into the financial crisis without adequate tools to handle it and vast regulatory changes are needed.
“To address this will require comprehensive reform,” Geithner said. “Not modest repairs at the margin, but new rules of the game.”
According to Rep. Jim Himes, D-4, the government must create a new government regulating body to make sure such a crisis never occurs again.
“If there is one thing we’ve learned, it’s that there are plenty of players that are capable of crashing the system,” said Himes of the banking system. “When an activity can crash the system we have a right to monitor it.”
Speaking in front of the House Committee on Financial Services, of which Himes is a member, Geithner outlined broad areas that the regulatory framework will cover. Included in the plan is the establishment of a single federal agency with responsibility for maintaining the stability of large institutions.
The proposed changes would also give the government the power to take over financial companies like AIG as it now has the power to do with insolvent banks.
Designed to weed out unnecessary risks to the country’s financial system, the agency would subject firms deemed to be too large to controls such as tougher capital requirements and greater oversight on borrowing.
Geithner said a single comprehensive regulator also would prevent companies from “cherry picking among competing regulators” as they do under the current system.
“The new rules must be simpler and more effectively enforced,” he said.
The plan, which requires congressional approval, would grant never-before-seen powers to the government, allowing it to more easily influence the financial system.
The administration’s goal with the new authority is to be able to prevent a repeat of the financial crisis surrounding AIG. The furor over the government bail-out of AIG peaked last week after a report that top executives had received $165 million in bonuses. The government plan also would for the first time place regulations on the derivatives market including credit default swaps, which AIG heavily traded driving the firm to near ruin.
Geithner did not specify where these powers would lie, but said the regulations would build on the model set by the Federal Deposit Insurance Corporation.
Several Republican members of the committee had cool responses to Geithner’s proposals. Rep. Scott Garrett of New Jersey said he worried the plan would give the government too much power without achieving its goals.
“The Federal Reserve itself was created to ensure that asset bubbles and panics sort of like we have right now don’t happen,” Garrett said. “But they do. Forgive me if I’m still a skeptic.”
Tuesday Sen. Chris Dodd, D-Conn., suggested the new authority be granted to a regulatory council made up of representatives from the FDIC, Federal Reserve and Treasury. He said such a system would provide the proper checks and balances.
“Overall the plan is consistent with the principles I’ve laid out,” Dodd said in a statement.
Himes said what department will be granted the regulatory powers is still an open discussion, but he is more concerned how the regulation will be shaped.
“I care more about what it looks like than where it lives,” Himes said.
At the G-20 summit meeting of industrialized nations to take place next week in London, Geithner pledged to build upon reforms in the United States with European partners, saying the country cannot move on by itself.
“We need to recognize that risk does not respect national borders,” he said.
According to Himes, the most important thing is that the new regulator be able to adapt and eliminate unnecessary risks.
“It is critical that the thing be flexible and adaptable, which are not words usually used to describe a regulator,” said Himes.
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