Geithner And Summers Make Case For Regulatory Reform In Op-Ed
WASHINGTON — Aiming for greater limits and more clarity in the nation's financial system, the Obama administration on Monday proposed adding muscle to the Federal Reserve and new restrictions on complex securities whose collapse choked lending and hit millions of American households.
At the same time, the administration gingerly sidestepped some regulatory changes, leaving aspects of the politically charged work for Congress, which must approve the proposed blueprint.
Treasury Secretary Timothy Geithner said the regulatory overhaul will eliminate "gaps" in the financial system that encouraged risky behavior leading up to the meltdown.
Under the administration's plan, all large institutions whose failure could threaten the stability of the financial system would be supervised by the Fed. That sets up a potential clash with some key lawmakers who believe the Fed is overtaxed and unaccountable to Congress.
"I just think we're heaping too much on the Federal Reserve," said Rep. Paul Kanjorski, D-Pa., a member of the House Financial Services Committee.
Obama's plan would create a council of regulators responsible for broad coordination across the financial system. Administration officials said it also would offer a stronger framework for investor protection. Industry officials expect the administration to propose a consumer protection entity to oversee products ranging from credit cards to annuities.
"We had a financial system that was fundamentally too unstable and fragile, and it did a bad job of basic protection of consumers and investors," Geithner said during an economic conference in New York hosted by Time Warner Inc. "Those are things we have to change."
The administration's regulatory proposals were previewed in an opinion piece by Geithner and Lawrence Summers, director of the president's National Economic Council, in Monday's Washington Post. Further details were obtained from Treasury and industry officials who have been discussing the regulatory overhaul with the administration. President Barack Obama will unveil the proposals in a speech Wednesday and Geithner will testify Thursday before Congress.
Obama appears to have backed away from a more extensive overhaul that would have consolidated all banking regulation into one agency. Supporters of this approach, including Sen. Charles Schumer, D-N.Y., have argued that the current system is inefficient.
Likewise, the Geithner-Summer's essay did not address regulation of the insurance sector. Insurance companies now are governed by state insurance commissions, and large insurance companies and some lawmakers have argued they need the option of a federal overseer to avoid the threat posed by insurance conglomerate American International Group Inc.
While several disputes over the proposal are likely to emerge as the legislation moves through Congress, the most high profile debate will center on the role of the Federal Reserve.
Kanjorski said the role of a risk regulator should be given to the Treasury Department. He said it would be a mistake to give the responsibility to an entity that isn't accountable to Congress or the president.
Sen. Christopher Dodd, D-Conn., has opposed giving the Fed such authority and has called for stripping some of the central bank's regulatory authority. Under Dodd's plan, the Fed would focus instead on its existing mission of setting monetary policy, establishing a payment system and being the "lender of last resort" if a bank fails.
The administration will propose tougher rules on transactions outside the banking system. Specifically targeted are mortgage- and other asset-backed securities that contributed to the credit crisis and now plague bank balance sheets.
For instance, the administration would require banks and other underwriters who sell bundled mortgages to Wall Street to retain 5 percent of a stake in the loans _ an idea also contained in House-passed mortgage legislation.
Rep. Brad Miller, D-N.C., who sponsored the House proposal, said the 5 percent figure may not sound like much. But the requirement can add up quickly and become a "powerful disincentive" to lenders to issue risky loans, eliminating many of the "fly-by-night" loan operators.
Geithner said the administration would urge other countries to adopt similar financial regulatory changes. He said U.S. changes "will have little effect if we fail to raise international standards along with our own."
The concern is that without tougher international rules governing financial firms, U.S. banks with operations overseas could shift some of their riskier businesses to countries with weaker regulations, said Simon Johnson, a former chief economist at the International Monetary Fund.
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Associated Press writers Stevenson Jacobs in New York and Anne Flaherty contributed to this report.
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JIM KUHNHENN and MARTIN CRUTSINGER | June 15, 2009 06:27 PM EST |
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