Treasury Secretary Timothy Geithner arrives in Congress on March 26 to testify on overhauling U.S. financial regulations.

27 March 2009

(Geithner offers plans for revamping financial regulatory system)

Washington — Treasury Secretary Timothy Geithner has announced plans to establish a single federal agency responsible for monitoring the entire U.S. financial system.

Calling the current U.S. regulatory structure “unnecessarily complex and fragmented,” Geithner said that it has “sometimes resulted in a failure to assign clear responsibility for achievement of some public policy objectives, notably for financial stability.”

Geithner said hedge funds, insurance companies and government-sponsored enterprises such as Fannie Mae and Freddie Mac should be subject to increased scrutiny, along with the banking sector, by a new regulatory agency.

“Let me be clear. The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end,” Geithner said in congressional testimony in Washington March 26.

The secretary said the financial regulatory system must be thoroughly overhauled to reduce the likelihood of catastrophic losses in the future. He called for “not modest repairs at the margin, but new rules of the road.”

The secretary laid out four components of regulatory reform: addressing systemic risk, protecting consumers and investors, eliminating gaps in the regulatory structure, and fostering international coordination.

He said the collapse of the Lehman Brothers investment bank and the AIG insurance company highlighted the interconnectedness of major financial companies. The troubles they caused cannot be dealt with on a company-by-company basis, Geithner said.

As for protecting consumers and investors, Geithner said, the fraud committed by Bernie Madoff has made it apparent that investment advisers and the funds they manage must be better regulated.

“Lax regulation also left too many households exposed to deception and abuse when taking out home mortgage loans,” Geithner said.

Explaining what he meant by gaps in the regulatory structure, Geithner said that financial institutions “cherry pick” among competing regulatory agencies to find the one that offers the lowest standards and constraints. The secretary said that “turf wars” among regulatory agencies contributed to the lax oversight that preceded the recession.

The treasury chief said the United States will work with the international community to ensure that uniformly high standards of financial behavior are applied globally.

“Risk does not respect national borders,” he said.

Geithner will accompany President Obama to the G20 summit in London April 2. The president will underscore “the imperative of raising standards across the globe and encouraging a race to the top rather than a race to the bottom,” Geithner said.

The treasury chief said his department will work with Congress to draft legislation needed to put in place the fundamental reforms he is recommending.

Barney Frank, a lawmaker who chairs the Financial Services Committee of the House of Representatives, said, “The days of ‘light touch’ regulation are over.”