Monday, June 15, 2009

Geithner Says U.S. Goal Will Be ‘More Boring’ Financial System

Treasury Secretary Timothy Geithner said the Obama administration’s overhaul of U.S. financial regulation will be aimed at preventing future crises by filling in oversight “gaps” that allowed too much systemic risk.

President Barack Obama on June 17 will unveil a set of proposals to prevent a repeat of the credit system freeze that followed the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. last year. The Federal Reserve will be given broader authority to supervise large, interconnected firms whose failure could destabilize the financial system.

Geithner today told an economic forum sponsored by Time Warner Inc. in New York that a major goal of the plan is fixing “an accountability problem” among regulators to create a “more stable” financial system.

“We’re going to try to eliminate gaps in the basic structure,” Geithner said. “We want to have a more boring system, a little less exciting, a little less drama.”

Geithner and Lawrence Summers, director of the White House’s National Economic Council, wrote in the Washington Post today the plan will also create a “council of regulators” to coordinate supervision across the financial system, and raise capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most- interconnected companies.

There will be more “robust reporting requirements” for issuers of asset-backed securities, a need for issuers to retain a financial interest in their product and a reduction in the reliance on credit rating firms. Regulation of futures and securities will be “harmonized,” derivatives will be regulated and their dealers subject to supervision, and consumer and investor protections will be increased.

Resolution Authority

The administration will also propose a resolution mechanism to allow the unwinding of troubled non-bank financial institutions. The failure of Bear Stearns and Lehman Brothers created a crisis of confidence among investors that led to the credit market freeze.

“We had a system that proved too unstable, too fragile, undermined what was a great strength in this country, which was a financial system that was the best in the world,” Geithner said at the Time Warner forum. “And those are things we have to change.”

Lenders are currently regulated by five separate federal agencies: the Fed, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the National Credit Union Administration. None of them will be eliminated under the administration’s plan.

‘Streamline’ Oversight

While it’s not an ideal system, “we’re trying to focus on the practical issues that were at the core of this problem,” Geithner said. “We can help streamline the oversight structure too, but we’re trying to focus on those things that are at the core of the problem.”

The administration has proposed rules to reduce incentives that lead executives to take excessive risks, and appointed Kenneth Feinberg as a “special master” to review executive pay at companies that get U.S. aid.

While Geithner declined to say whether he thinks bankers are interested only in their pay, he said compensation plans were designed to “overwhelm” the “checks and balances” that are supposed to protect the financial system from excessive risk.

“The incentives were just too powerful,” he said. “And that’s something we have to fix.”

Congressional Action

Congress will have to authorize many of the changes in the plan, Geithner said. It is imperative lawmakers act “while the memory of the crisis is still acute in peoples’ minds, because we don’t want complacency to set back in.”

Risks of a deeper global recession have “dramatically diminished and that has helped provide some stability in economic activity,” Geithner said. “But again, it’s very early still and we’ve got a ways to go.”

The U.S. unemployment rate will continue to rise even after growth resumes, he said.

Geithner said he expects the administration’s health-care plan to pass with “broad support.” That will be critical for dealing with the nation’s “very daunting long-term fiscal challenges,” he said. The Congressional Budget Office projects this year’s federal budget deficit will reach a record $1.85 trillion this year.

“The path to fixing the economy does go through health care,” he said.

Dismissing reports he and Summers are feuding over territory, Geithner called the NEC director “one of the most talented people in the world,” and said they have a “terrific, excellent, productive relationship.”