Treasury Secretary Timothy Geithner on Thursday called for broad reforms to curb risk taking on Wall Street, including a new regulator to oversee the entire financial system in a bid to restrain behavior that led to the worst credit crisis since the 1930s.
In testimony to Congress, Geithner said comprehensive reform was needed to guard against future crises. Not modest repairs at the margin, but new rules of the game.
He pressed lawmakers for wholesale changes, including the creation of a single regulator to keep tabs on risks that could threaten the entire financial system.
Leaders from the Group of 20 rich and emerging nations gather for a meeting next Thursday in London at which regulatory reform will be high on the agenda. President Barack Obama will make the case that Washington is moving forward boldly and others must step up to do the same.
Under the plan Geithner laid out in testimony to the House of Representatives Financial Services Committee, one entity would be responsible for ensuring systemic stability over major institutions and critical payments and settlement systems. Many lawmakers have considered giving the Federal Reserve that role.
Currently, a hodge-podge of regulators controls differing parts of the banking system and some participants in insurance and other sectors largely fall between the regulatory cracks.
Geithner said he thought the government could do a lot to institute regulatory reform without requiring new legislative authority. He said it was important to get started now.
We have a moment of opportunity now. We don't want to waste this opportunity, Geithner said. We need to act.
HEDGE FUNDS, PRIVATE EQUITY FIRMS FACE SCRUTINY
In one key move, Geithner said hedge fund advisers and others who control big pools of capital like private-equity funds and venture capital firms should be forced to register with the Securities and Exchange Commission.
Some European officials, notably in Germany, have long sought registration of hedge funds and criticized free-wheeling operators in the United States for helping create an environment that permitted excessive risk-taking. Hedge funds are largely unregulated in the United States.
Geithner used the example of American International Group to make the point that companies like insurers were taking huge risks on exotic products like credit default swaps that were barely understood by participants.
Let me be clear: 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 from losses must end, Geithner said.
Firms whose collapse could post a risk to the entire financial system would be required to hold more capital than other financial companies, and would face tougher liquidity, counterparty and risk-management rules.
The systemic risk regulator would get powers to order prompt corrective action if capital levels decline -- similar to those that now are held by the Federal Deposit Insurance Corp, a U.S. bank regulator.
Despite the strong prescriptions to increase scrutiny and capital requirements, the Obama administration signaled some flexibility on accounting. For example, so-called fair value accounting rules will be reviewed to try to identify changes that could reduce wild swings in profit and capital levels as markets move up and down.
Similarly, accounting for loan loss reserves might be revised to account for losses throughout the business cycle to ensure they are setting aside enough money to get through rough economic spots without collapsing.
Part of his proposal, which Geithner outlined earlier this week, would establish a mechanism for the government to step in when a systemically important firm is at risk of failing, and either shut down in an orderly manner or find a buyer.
We're basically suggesting a model which would substantially rely on the FDIC itself to run this new regime, he said.
(additional reporting by David Lawder, Karey Wutkowski, Corbett B. Daley and Patrick Rucker, Editing by Walker Simon)