Geithner On Hill To Propose New Rules For Wall St.
STEVE INSKEEP, host:
It's MORNING EDITION from NPR News. Good morning. I'm Steve Inskeep.
RENEE MONTAGNE, host:
And I'm Renee Montagne. When Treasury Secretary Timothy Geithner goes back to Capitol Hill today, he'll outline for lawmakers some tough new proposals: regulations aimed at reining in high-flying hedge funds and exotic financial instruments like credit default swaps. The administration is aiming to expand the government's powers to regulate banks and other financial institutions, and here to tell us more is David Wessel. He is economics editor of the Wall Street Journal and a regular guest on this program. Welcome.
Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning.
MONTAGNE: Now in proposing new powers for the federal government, what is the key problem Secretary Geithner is trying to solve?
Mr. WESSEL: Well, there actually are a couple of big problems. One is to change the rules so that never again do they have to sit by and watch Lehman Brothers, the big investment bank, go into bankruptcy because the Fed and Treasury do not have enough power to save it, and never again do they have to pour $180 billion of our money into AIG because they can't pick and choose among the creditors of AIG. And then the third thing, or maybe the first thing, is to set up some new rules so we don't get confronted again with a situation like we're in now.
MONTAGNE: And, you know, when you talk about new powers, had the federal government had the kind of powers that Timothy Geithner is talking about at the time AIG, for instance, hit the skids last fall, what would have been the difference?
Mr. WESSEL: Well, the government would have been able to take over the company. It would have been able to break those contracts for the bonuses that got so much attention a couple of weeks ago. It would have been able to decide, like a bankruptcy court judge would, who shall get paid and who shall not. And it would have had a special fund of money for doing this so they wouldn't have had to make these late-night decisions at the Federal Reserve to invoke very unusual powers to lend money.
MONTAGNE: Although I must say it feels like the government has taken over AIG, or at least 80 percent of it.
Mr. WESSEL: Not - right. I mean, the government has taken it over, but in the worst possible way. It doesn't really have the power to decide who of its creditors should get paid or not. So, they are putting in taxpayer money to make good on the bets and contracts and the obligations that AIG has to other people because there's no rules and no process to decide that we'll pay these people and we won't pay these people, and Goldman Sachs will get 80 cents on the dollar, but the secretary will get a hundred cents on the dollar on her pension.
We have those rules for banks now, and there is a bankruptcy court process for other companies. But these big financial companies are too big to run through bankruptcy and too complicated to run through bankruptcy, and there is no alternative procedure like the one the Federal Deposit Insurance Corporation has to close a bank. This would give the FDIC the same power over insurance companies and big investment banks that it has today over regular banks.
MONTAGNE: Okay. So this would be a way to cope better, as you would see it, with a failing financial institution. What about preventing these institutions from getting to that point of failure?
Mr. WESSEL: Right. Well, Secretary Geithner today will outline much broadened powers for the federal government, new rules that will require firms that do not now have to give information to the government like hedge funds and private equity funds to give that information to the government so the government can monitor them. There will be new rules that require big, so-called systemically important institutions to hold bigger capital cushions. So they'll have more money of their own to deal with adversity, and it will regulate some financial instruments that previously have been unregulated.
It's a very large expansion of the financial regulatory power of the government and will give the Federal Reserve - although the Fed isn't named in the proposal - the overarching power to be what's called a financial stability regulator - that is, to look at the risks for the whole system.
MONTAGNE: How is Congress likely to view this plan?
Mr. WESSEL: Well, I think there's ample evidence that Congress understands that the current situation is unacceptable. Nobody can defend a system that allowed what's just happened to happen. There will be some substantial disagreement among various interest groups about how this should work. Insurance companies and hedge funds and people who trade in derivatives and private equity funds -everybody will now be maneuvering, and they'll have some friends in Congress. The question as how much clout do they now have in Congress to get the thing tweaked in their direction?
So I think there's - will be lot of receptivity in Congress to doing something, but whether this something is acceptable and whether they can actually get it done quickly is an open question.
MONTAGNE: David, thanks very much.
Mr. WESSEL: You're welcome.
MONTAGNE: David Wessel is economics editor of the Wall Street Journal.