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Geithner Outlines Regulation Overhaul

ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel. Today, Treasury Secretary Timothy Geithner presented Congress with a roadmap for financial regulatory reform. He told lawmakers comprehensive reforms are needed, not modest repairs. Geithner said the goal is to fix the flaws in regulation that helped create the worst economic crisis in 70 years. NPR's John Ydstie reports.

JOHN YDSTIE: Geithner gave the House Financial Services Committee a preview of one of the pillars of regulatory reform on Tuesday. That proposal was for a new system for the government to step in and take over faltering financial giants like AIG, much as the FDIC takes over failing banks. Today, Geithner added several other components, including proposals for more oversight over hedge funds and over financial instruments like credit default swaps. He also called for a single, independent regulator for firms that are judged too big to fail. That regulator would be probably be the Federal Reserve. These measures, he said, would help the government prevent and manage future financial crisis.

Secretary TIMOTHY GEITHNER (Treasury Department): I think it's a great, tragic failure of the country that we came into this crisis without anything like the broad authority governments need to manage financial crisis effectively and protect the economy from the trauma that comes.

YDSTIE: After debacles like the one at AIG, Democrat Al Green of Texas greeted the proposals with great enthusiasm.

Representative AL GREEN (Democrat, Texas): The foxes have raided the AIG henhouse, and the foxes don't want us to secure the henhouse. It is time for us to act.

YDSTIE: But a number of lawmakers, mostly on the Republican side, were uncomfortable with the expansion of government regulatory power in the proposals, particularly the power to take over faltering non-bank financial firms. Here's Republican Donald Manzullo of Illinois.

Representative DONALD MANZULLO (Republican, Illinois): But, I mean, do you realize how radical your proposal is?

Sec. GEITHNER: It's not a radical proposal. It's a…

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 (unintelligible)…

Rep. MANZULLO: If it's prudent and carefully designed, Mr. Secretary, then you would have the answers to some of my questions, such as what size business would be subject to this?

YDSTIE: One big change in Geithner's proposals would be requiring hedge funds that reach a certain size to register with the government and open themselves to scrutiny about the risks they're taking. Those that are judged to pose risks to the system might be required to meet certain capital requirements as cushions against losses.

Geithner emphasized that higher capital requirements were a key to reducing the risk to the economy and taxpayers.

Sec. GEITHNER: Capital sets the amount of risk you can take, overall. Capital ensures 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 consequence of mistakes in judgment and uncertainty in the world.

YDSTIE: The administration is also suggesting that complex financial instruments - particularly credit default swaps - be regulated. They were originally designed as insurance policies to protect against defaults on bonds and other corporate debt. But now, credit default swaps are sometimes used to speculate on which firms will default. The administration wants them to be traded more transparently in public exchanges, but a number of a lawmakers suggested simply banning them. Geithner had this response.

Sec. GEITHNER: It's too hard to distinguish what's a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome. If we could find a way to separate those two types of transactions from each other, we could do that - we would have done that a long time ago across a whole range of (unintelligible). But it is terribly hard to do.

YDSTIE: Again, Geithner said forcing investors to put up capital so they can make good on their positions, whether they're speculating or not, is the best answer. The administration will provide a more detailed blueprint of its reform plan later in April.

John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.