Geithner Pushes New Financial Rules; GOP Skeptical
RENEE MONTAGNE, host:
It's MORNING EDITION from NPR News. Good morning. I'm Renee Montagne.
STEVE INSKEEP, host:
And I'm Steve Inskeep.
We're finishing another week of changes to the financial system. Treasury Secretary Timothy Geithner unveiled not one, but two new plans.
MONTAGNE: In a moment, we'll ask the presidential advisor about the plan to buy toxic assets. First we'll hear the proposal to prevent the next crisis. Geithner wants to change the rules, to make it harder for one failed institution to wreck the economy. Here's NPR's David Welna.
DAVID WELNA: As House Financial Services Committee Chairman Barney Frank was quick to point out yesterday, anyone who wonders whether the current financial regulatory system needs fixing, should consider two major financial institutions.
Representative BARNEY FRANK (Democrat, Massachusetts; House Financial Services Committee Chairman): And the two glaring examples are Lehman Brothers, where nothing was done and AIG, where everything was done. And I believe we are looking for an alternative method to avoid those two polar extremes.
WELNA: The problem, Treasury Secretary Geithner told Frank's panel, is that the federal government right now does not have the kinds of regulatory tools it needs to avoid those two extremes.
Secretary TIMOTHY GEITHNER (Department of Treasury): To address this, we'll require comprehensive reform, not modest repairs at the margin, but new rules of the game. And the new rules must be simpler and more effectively enforced.
WELNA: Geithner had six proposals for greater systemic stability. First, he'd want a single government entity to watch over major financial institutions. Second, he'd require bigger capital reserves for institutions that could pose a risk to financial stability. Third, large private hedge funds would have to register, for the first time, with the Securities and Exchange Commission. Fourth, exotic financial products, such as credit default swaps, would have to be traded and regulated through a central clearing house. Fifth, he'd have the SEC tighten roles for money market funds.
And finally, he called for powers to seize financial institutions beyond banks. Scott Garrett, the panel's top Republican, reminded Geithner, this is not the first time federal authorities have tried slapping on new regulations to fix a financial fiasco.
Representative SCOTT GARRETT (Republican, New Jersey): So, forgive me if I'm still a skeptic when I hear, if we only have a systemic regulator, that this will never happen again.
WELNA: But Geithner said he would make no such promises.
Sec. GEITHNER: Nothing we do here today, over the next six months, we'll offer the prospect of preventing all future financial crises. We can make sure that when they happen in the future, we can act more quickly, more effectively, to contain the damage, to put a firebreak around the most - weaker parts of the system.
WELNA: Such a firebreak he said, would keep the flames from one failing entity from leaping over and burning more prudent and responsible players in the financial system. But Illinois Republican, Donald Manzullo was hardly convinced. He said he was not at all comfortable with the idea of federal authorities deciding to take over financial firms.
Representative DONALD MANZULLO (Republican, Illinois): But you realize how radical your proposal is?
Sec. GEITHNER: It's not a radical proposal.
Rep. MANZULLO: Oh this is absolutely. You're talking about seizing private businesses and you don't consider that to be radical?
Sec. GEITHNER: No this is a prudent, carefully designed proposal to protect our financial system from the…
Rep. MANZULLO: If it's prudent and carefully designed, Mr. Secretary, then you'd have the answers to some of my questions, such as what size business would be subject to this.
WELNA: Geithner assured Manzullo, he simply did not know at this point, how many American firms might come under such systemic regulation. The larger point, he said, is to avoid having the American taxpayer on the hook for companies deemed too big to fail.
Sec. GEITHNER: The most simple way to frame it is capital, capital, capital. Capital sets the amount of risk you can take overall. Capital assures you have big enough cushions to absorb extreme shocks. You want capital requirements to be designed so that, given how uncertain we are about the future of the world, given how much ignorance we fundamentally have about some elements of risk that, there is a much greater cushion to absorb loss and to save us from the consequences of mistaken judgment and uncertainty in the world.
WELNA: And because market forces alone won't ensure firms have enough capital reserves, Geithner added, standards have to be imposed through regulation. His plan should please the European allies, President Obama meets with next week at the G-20 summit. The United States' problem, they say is too little regulation.
David Welna, NPR News, the Capitol.
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