Geithner offers plan to fix financial regulatory system, but Ellison asks for more details

Timothy Geithner
REUTERS/Jonathan Ernst
Timothy Geithner before the House Financial Services Committee today: It’s time for “news rules of the game.”

Editor’s note: This is an updated report of today’s earlier story about Treasury Secretary Timothy Geithner’s testimony.

WASHINGTON, D.C. — While U.S. Treasury Secretary Timothy Geithner offered a broad glimpse today of a future financial regulatory regime that would include unprecedented government supervision of Wall Street’s wheeling and dealing, he steered clearof detailing the administration’s plans for protecting consumers.

Responding to questioning by Rep. Keith Ellison, D-Minn., who sits on the House Financial Services Committee, Geithner said: “We are not at a position today where we want to lay out any details on the consumer side. I just want to underscore that that will be a critical part of our reform agenda.”

 

 

Deflected, Ellison probed further with a more specific question about a proposed plan to create a financial product safety board.

The idea, originally offered by Elizabeth Warren, a well-known professor of law at Harvard who specializes in contract, bankruptcy and commercial law, would add consumer protection to the factors that lenders need to consider in creating or offering financial products, such as mortgages.

“Go into any appliance store in America and look for a toaster with a one-in-five chance of exploding. You won’t find one,” Warren wrote in Harper’s Magazine last fall. “But at any mortgage brokerage in the country it has been possible to purchase a loan with a one-in-five foreclosure rate, and the broker doesn’t even have to tell you the odds.”

During today’s committee hearing, Ellison asked Geithner, “Are you familiar with Elizabeth Warren’s concept of a financial products safety board?”

“I am,” said Geithner.

“Could you offer your thoughts on it?” Ellison asked.

“I think it is an interesting proposal. That’s one of the many things we’re looking at,” said Geithner.

After Geithner’s testimony, Ellison expressed disappointment about his responses.

 “I think they should be farther along than they are, you know,” said Ellison. “I mean the consumer issue is critical. This started in the consumer sector. The mortgages were really how this thing came to be, not to mention credit cards, another form of consumer debt. I think they should have had a little more to tell us.”

Ellison also asked Geithner about creating an independent regulatory board to handle the new workload that would come out of the administration’s proposal.

“Again, in our structure… there is a complicated set of checks and balances,” Geithner replied. “So there is an important role for the independent regulatory authority supervisor and for the FDIC and the Fed, but that is not authority that the executive branch can delegate or separate because ultimately it relates to hugely important consequential judgments about the risks the taxpayers are exposed to.”

After the hearing, Ellison said that he still tended to favor the idea of an independent board to handle new regulatory authority.

“Once you start layering on more and more and more authority you could get to the point where you ask an [agency] to do too many things and it can’t pursue its core mission well,” said Ellison.

 

Earlier story below:

WASHINGTON, D.C. — U.S. Treasury Secretary Timothy Geithner’s repeat appearance before the House Financial Services Committee today got off to a surprisingly civil and almost conciliatory start this morning.

Compared to Tuesday’s circus — marked by sign-waving protestors, committee chairman Rep. Barney Frank, D-Mass., yelling at just about everyone, and Federal Reserve Chairman Ben Bernanke respectfully informing one of the representatives that his question was “poorly worded” —  today’s showing was much quieter and more orderly with Geithner repeatedly reassuring committee members that their questions were good and worries understandable.

Perhaps playing into the general cool-down and demeanor shift was the fact that Geithner’s main objective for being on the Hill today was not to explain what happened with the AIG executive bonuses but to rally support for the administration’s plan to overhaul the financial regulatory system.

In prepared testimony before the House committee, Geithner called for “new rules of the game.”

“The new rules must be simpler and more effectively enforced and produce a more stable system that protects consumers and investors, that rewards innovation, and that is able to adapt and evolve with changes in the financial market,” said Geithner.

According to Geithner, it all comes down to “capital, capital, capital.”

His proposals would give regulators power to closely supervise companies that have become “too big to fail” and would force those companies to be more prudent by increasing capital or decreasing borrowing.

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For the first time, hedge fund, private equity and venture capital fund advisers would also have to register with the Securities and Exchange Commission (SEC).

But while Geithner broadly sketched out the objectives of the regulatory overhaul, he did little to fill in certain details — a point highlighted by this question from Rep. Keith Ellison, D-Minn.:

Ellison: Could you explain how you think consumer protection should be incorporated into comprehensive regulatory reform?

Geithner: We are not at a position today to where we want to lay out any details on the consumer side. I just want to underscore that that will be a critical part.

In the relatively rapid-fire exchange, compared to the general pace of the hearing, Ellison also asked Geithner for specifics on how the new regulations would work for hedge funds and why an independent regulatory authority couldn’t be used to monitor the proposed regulations.

Ellison: You indicated that capital requirements for systemically important firms must be more robust than for other firms. However, many systemic entities like hedge funds currently face no capital requirements whatsoever. Could you discuss in greater detail how a capital adequacy regime would work for these firms [hedge funds]?

Geithner: We did not propose to establish capital requirements for hedge funds. What we are saying, though, is that the large institutions, principally the banks and the major large complex regulated financial institutions, are held to a set of requirements on capital, liquidity, reserves, risk management, that are commensurate with the risk they pose. And because their risks are greater and because the consequences of their failure is greater, they need to be subject to a higher set of standards and greater constraints on leverage. But we’re not proposing to establish capital requirements for the broad universe of hedge funds and private pools of capital that exist in our markets. We want them to register with the SEC if they reach a certain scale and in the future if some of them individually reach a size where they may be systemic, then at that point we believe they should be brought within a regulatory framework that’s similar to that which exists for banks….

Ellison: Could you tell me why the Treasury should be given resolution authority over systemically significant financial institutions? [Simple translation: power to dismantle or reorganize large companies, whose failure could compromise the larger economy]…Why would the Treasury be given such authority?

Geithner: We are actually proposing a structure in which the FDIC would have a central role in managing this regime, but as is true now, in the existing process… the judgment by the Treasury is necessary. The concurrence of the Treasury is necessary for a range of actions, as you would expect because the Treasury is responsible in some sense regarding the interest of the taxpayer.

Ellison: But why not an independent regulatory authority for those things?

Geithner: Again, in our structure… there is a complicated set of checks and balances. So there is an important role for the independent regulatory authority supervisor and for the FDIC and the Fed, but that is not authority that the executive branch can delegate or separate because ultimately it relates to hugely important consequential judgments about the risks the taxpayers are exposed to.

More to come on Ellison’s reactions to Geithner’s answers.

Cynthia Dizikes covers Minnesota’s congressional delegation and reports on issues and developments in Washington, D.C. She can be reached at cdizikes[at]minnpost[dot]com.

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Comments (1)

  1. Submitted by Glenn Mesaros on 03/29/2009 - 03:38 am.

    Fire Larry Summers! He is protecting the Wall Street Banks: Wells Fargo, Citibank, JP Morgan, and Bank of America from necessary FDIC takeover and bankruptcy proceedings.

    Larry Summers was Clinton Treasury Secretary. Just prior to moving up to the post of Treasury Secretary, Summers became a singular and strong advocate inside the Clinton Administration for what was nothing less than a time bomb – Phil Gramm”s other measure that let these banking-conglomerates-in-the-making create and trade derivatives without regulation.

    Indeed, during a 1998 Senate hearing, Summers testified against the regulation of the derivatives market on the grounds that we could trust Wall Street! “The parties to these kinds of contract,” he said, “are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities laws.” He continued to defend over-the-counter derivatives and block all moves to regulate them up through 2000, calling them “an important component of the American capital markets and a powerful symbol of the kind of innovation and technology that has made the American financial system as strong as it is today.”

    It would be hard to make assumptions that turned out to be more wrong. Larry Summers was either the most corrupt and sinister Treasury Secretary in our nation”s history, or the most incompetent one. However, his high level managing position for D.E. Shaw, one of the most secretive of hedge funds, upon leaving office, would tend to argue in favor of the former.

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