Treasury Secretary Timothy Geithner testified before the House Financial Services Committee again on Thursday, pleading his case for an upheaval in financial regulation and expanded authority over a wider scope of financial institutions.
Despite the financial crisis plaguing the nation over the last 18 months and the institutional failures and value erosions that have come with it, Geithner said, our financial system still serves an ""essential and basic function."" But he said, our system has failed us in basic fundamental ways, proving to be too unstable and fragile for the periodic booms in real estate markets and in credit, followed by busts and contraction.
""To address this will require comprehensive reform,"" Geithner told lawmakers. ""We need much stronger standards for openness, transparency, and plain, common sense language throughout the financial system. And we need strong and uniform supervision for all financial products marketed to consumers and investors, and tough enforcement of the rules to ensure full accountability for those who violate the public trust.""
Alongside Federal Reserve Chairman Ben Bernanke ""earlier this week"":http://dsnews.comindex.php/home/news_story/2747, Geithner petitioned the House committee to institute a new resolution authority, which would give the federal government the power to seize any institution in danger of collapse whose failure might threaten the stability of the overall financial system.
Geithner reiterated the need for this resolution authority when he spoke to House leaders on Thursday. However, this piece of the reform plan will likely stand on its own before lawmakers, as President Obama has requested it be pushed through the legislative channels now, separate from a lengthy deliberation over a complete financial system overhaul.
Included in the administration's blueprint for reform is the establishment of a single agency ""with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities."" Geithner said this chief supervisor would regulate both financial products and institutions based on the economic function they provide and the risks they present, not the legal form they take. ""We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints,"" Geithner said.
The administration is proposing regulatory oversight for private pools of capital - hedge funds, private equity funds, and venture capitalist - as well as the financial derivatives market including instruments like credit-default swaps, which investors have used to hedge against and to speculate on high-risk mortgage-backed securities (MBS).
Under the administration's reform proposal, hedge fund, private equity, and venture capital fund advisers would, for the first time, have to register with the Securities and Exchange Commission (SEC). According to _""The New York Times"":http://www.nytimes.com_, they would be required to provide the government — on a confidential basis — information on how much they borrow to leverage their investments as well as information about their investors and trading partners. The SEC would then share those reports with the new systemic risk regulator.
Some financial derivative products, like stock options and interest rate futures, are already regulated because through trade on exchanges like the Chicago Board of Trade. But some of the more exotic derivatives that trade privately, like credit-default swaps, have existed almost entirely in the informal, over-the-counter market, beyond the reach of regulatory scrutiny.
Geithner's proposal would require that all standardized derivatives be traded through a regulated clearinghouse. The _Times _explained that traders would be required to provide documentation on their collateral and borrowings, and would be subject to new eligibility requirements and new standards for trading and settlement.
The Treasury secretary did not provide specific details on how these proposals might be laid out, saying they'd be outlined further over the coming weeks.
Lawmakers seem to support new rules that could curtail some of the abuses that led to the nation's current crisis, but still appear cautious of Geithner's aggressive propositions.
The _""Wall Street Journal "":http://www.wsjonline.com_reported that Rep. Al Green (D-Texas) said he supported greater oversight but warned the Treasury secretary of the push-back from the financial community. ""The foxes don't want us to secure the hen house,"" Green said. ""It's our job to secure the AIG hen houses of the world.""
Rep. Scott Garrett (R-New Jersey) told the _Journal_, ""Before we get too far down the road of 'fixing' problems in our regulatory structure, I would argue that more consensus needs to be reached on exactly what the problems are that we are fixing.""