Treasury Secretary Timothy Geithner said sweeping new rules of the game are required to make sure the financial system is regulated tightly enough that it cannot again threaten the entire economy.
The failures of the past 1-1/2 years show that tinkering at the margin won't work and that wholesale changes to impose a single systemic regulator for participants in the financial system are necessary, he said in prepared remarks for delivery to the House Financial Services Committee..
The new rules must be simpler and more effectively enforced and produce a more stable system ..and that is able to adapt and evolve with changes in the financial market, Geithner said.
The first step must be to decide upon a single entity that will have responsibility for ensuring systemic stability over major institutions and over critical payments and settlement systems, Geithner said. In the past, the Federal Reserve has been cited as the most likely agency for that task.
In a key move, Geithner said advisers to hedge funds and other private pools of capital like private-equity funds and venture capital funds that manage assets over a certain size should be forced to register with the Securities and Exchange Commission.
The U.S. Treasury chief testified a week before he and President Barack Obama attend an April 2 Group of 20 meeting in London that is focused on reforming the financial system to try to help lift the global economy out of recession.
European officials have long sought measures like applying greater regulatory oversight to free-wheeling hedge funds.
Geithner also 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 and 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.
(Reporting by Glenn Somerville)