Geithner Calls for Tougher Standards on Risk

By DAMIAN PALETTA, MAYA JACKSON RANDALL and MICHAEL R. CRITTENDEN

Bloomberg News

Treasury Secretary Timothy Geithner testifies at a House Financial Services Committee hearing on Thursday.

WASHINGTON -- Treasury Secretary Timothy Geithner is calling for changes in how the government oversees risk-taking in financial markets, pushing for tougher rules on how big companies manage their finances as well as tighter controls on some hedge funds and money-market mutual funds.

"We need much stronger standards for openness, transparency, and plain, common sense language throughout the financial system," the secretary told the House Financial Services Committee Thursday morning. "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."

Mr. Geithner pressed the Obama administration's sweeping new plans for revamping U.S. financial regulations. Under the framework Treasury unveiled Thursday, the Obama administration is seeking to close regulatory gaps to better prevent shocks to the financial system, boost consumer and investor protection, improve international coordination and bring more, complex financial products under federal oversight.

The move represents an early salvo in what will likely be a long debate about how to overhaul the rules governing markets. It comes just days before Mr. Geithner and President Barack Obama travel to London to meet with other global leaders to discuss the crisis.

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Bloomberg News

Timothy Geithner, in New York Wednesday, called for new oversight power.

The Treasury has been rolling out its proposals piecemeal. It announced Wednesday a central plank of the U.S. effort: a call to give powers to the Treasury and Federal Deposit Insurance Corp. to seize any company whose collapse could put the broader economy at risk.

"Our job is to craft rules...that allow the society to get the best of these wonderful value-added innovations while curtailing some of the abuses," said Committee Chairman Barney Frank (D., Mass.) in his opening statements at the hearing.

Rep. Al Green, a Democrat from Texas, said he supported greater oversight but warned Mr. Geithner of the push-back from the financial community.

"The foxes don't want us to secure the hen house," Mr. Green said. "It's our job to secure the AIG hen houses of the world."

Still, some lawmakers remain skeptical of the administration's plan.

"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," said Rep. Scott Garrett (R., N.J.).

Mr. Geithner, however, said the U.S. -- and countries around the globe -- have an opportunity to use the current financial crisis as a way to enact the type of regulatory framework needed to prevent future crises from happening.

"We have a moment of opportunity now, and we don't want to waste that opportunity," Mr. Geithner told lawmakers, noting the need for global cooperation. "We can't move here alone."

Mr. Geithner said the administration is developing a plan for boosting consumer and investor regulation as well as a new initiative "to address prudential supervision, tax havens, and money laundering issues in weakly regulated jurisdictions."

 

Geithner Cracks the Whip on Risk-Taking

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Treasury Secretary Timothy Geithner is calling for sweeping new rules to limit the level of risk-taking in the American financial system, in an ongoing effort to try to help lift the global economy out of recession. Video courtesy of Reuters.

The Treasury chief also said the financial system needs a single entity to oversee risks to the financial system. In addition to overseeing systemically important firms, that entity also should have the authority to keep a watchful eye on systemically important payment and settlement systems, Mr. Geithner said, describing federal authority over credit-default swaps and other over-the-counter derivatives as fragmented. Under Treasury's plan, the government would regulate the markets for credit-default swaps and over-the-counter derivatives for the first time.

"It's a great tragic failure of the country that we came into this crisis without anything like the broad authority" needed, he said.

Describing the issue further, Mr. Geithner said Treasury shouldn't be the so-called systemic-risk regulator. It instead should be an independent agency, he said, and there should be input and checks and balances provided by other regulatory agencies to make sure one agency doesn't consolidate so much authority.

Mr. Geithner calls for a strict and consistent set of regulations for large firms, as well as more power for the government to monitor emerging risks to the economy. The new rules will likely require financial institutions to hold more capital as a buffer against losses and will bolster risk-management standards. All told, the proposals would mean significant expansions of power for the Treasury, Federal Reserve and other regulators.

It isn't clear which companies would be brought under this umbrella. Administration officials believe they could include banks' parent companies, insurance conglomerates and certain hedge funds, among others. They said it would depend on a company's size, leverage, reliance on short-term funding and role in the financial system.

One area where the U.S. is departing from its European allies is the Obama administration's approach to hedge funds, private-equity firms and venture-capital funds. Mr. Geithner, in his remarks, said all firms over a certain size should register with the Securities and Exchange Commission and disclose certain information so government officials can determine whether their size or complexity puts the broader economy at risk. But he said the administration doesn't seek to regulate hedge funds like banks.

"There are no reliable, comprehensive data available to assess whether (hedge funds) individually or collectively pose a threat to financial stability," Mr. Geithner said. "However, in the wake of the Madoff episode, it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage."

Mr. Geithner also offered his support for some sort of federal insurance legislation, a policy shift long sought by certain sectors of the insurance industry. "There's a good case for an optional federal charter for insurance companies," he said. That would be a victory for life-insurance companies and large property and casualty firms that have been lobbying Congress for years to create a federal regulator for their industry.

Administration officials want Congress to give the SEC more power over money-market mutual funds so that the government can limit the risk profiles of these companies. Fears about the stability of these funds led investors to flee these products during the height of the financial crisis last fall.

Addressing failures in the financial system "will require comprehensive reform -- not modest repairs at the margin, but new rules of the road," Mr. Geithner said.

Write to Damian Paletta at damian.paletta@wsj.com, Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com and Michael Crittenden at Michael.crittenden@dowjones.com