The Obama administration made gains on Tuesday in its push for U.S. financial reform, unveiling a landmark bill to tackle systemic risk in the economy and winning congressional committee approval for a measure to expose hedge funds to more government scrutiny.
The systemic risk bill would grant vast powers to a new systemic risk regulatory council, the Federal Reserve and the Federal Deposit Insurance Corp to monitor and address risks to economic stability posed by shaky financial holding companies.
Those deemed severely undercapitalized by the council could be restructured or even shut down by regulators. Managers could be dismissed, credit exposures limited, pay and bonuses restricted, acquisitions and new ventures blocked.
In a measure meant to reverse decades of weakened oversight of Wall Street and the banks, the bill aggressively asserts government power to prevent bailouts like last year's rescues of AIG, Citigroup and Bank of America.
It also attempts to shift the cost of future financial stabilization efforts toward industry and away from taxpayers by forcing financial firms with more than $10 billion in assets to foot the bill for any losses from Federal Deposit Insurance Corp actions to resolve the problems of failing firms.
President Barack Obama said on Tuesday the bill was urgent and crucial to prevent excessive risk-taking by big firms.
We cannot meet these tests with a set of small changes at the margin, Obama said in a letter to Barney Frank, chairman of the House of Representatives Financial Services Committee, that also stressed the importance of building a stronger financial system in which no firm was too big to fail.
If approved by Congress, where industry lobbyists and Republicans were certain to push back against it in weeks ahead, the bill would form the centerpiece of a sweeping effort by Democrats to tighten bank and capital market oversight.
After the worst financial crisis since the 1930s, Treasury Secretary Timothy Geithner told a packed room of Wall Street dealers and bankers on Tuesday they could not look America in the eye and argue that financial regulation is fine as it is.
Geithner said the financial system was tragically fragile after the crisis and the government must respond by adding new regulations and strengthening old ones.
It's a war of necessity, not a war of choice, he said at the Securities Industry and Financial Markets Association annual meeting in New York. And it's a just war.
Another part of the administration's reforms -- requiring hedge funds and private equity firms to register with the government -- won approval from Frank's committee on Tuesday.
The committee already has approved bills to form a new watchdog agency to protect consumers of mortgages and credit cards, and to regulate over-the-counter derivatives.
The full House was expected to vote as early as Thursday on the financial consumer watchdog bill, also a central piece of the administration's reform program.
Frank will meet this week with House Agriculture Committee Chairman Collin Peterson to reconcile their panels' OTC derivatives bills, said Commodity Futures Trading Commission Chairman Gary Gensler on Tuesday at a roundtable meeting.
The CFTC is working with both panels, which are targeting a vote on the House floor for a single bill next week, he said.
Frank's committee was expected to vote on Wednesday on a bill to regulate credit rating agencies. The panel put off for now a proposed bill to set up a new National Insurance Office to monitor insurers, which are now policed at the state level.
While House Democrats have been making steady progress on financial reforms, despite stiff resistance from lobbyists and Republicans, the Senate has been moving very slowly.
Key lawmakers in the upper chamber of Congress are still far apart of key issues, including the consumer watchdog, known as the Consumer Financial Protection Agency, aides said.
(Reporting by Kevin Drawbaugh, Rachelle Younglai, Lisa Lambert, Ross Colvin and Charles Abbott, with Al Yoon and Walden Siew in New York; editing by Carol Bishopric)