Geithner details vast plan to regulate financial firms

WASHINGTON — The Obama administration is proposing the most far-reaching overhaul of the financial industry since the Great Depression, including measures that would for the first time regulate hedge funds and give government the power to seize and dismantle companies deemed a threat to the economy.

The measures, which would require approval by Congress, come after last fall's near-meltdown of the global banking system and in advance of next week's meeting of the Group of 20 economic powers.

Key measures outlined by Treasury Secretary Timothy Geithner on Thursday included:

• Giving the Federal Reserve or another agency the authority to oversee the entire economy for signs of "systemic risk."

• Passing tougher requirements for the amount of money and assets financial institutions need to have on hand so they can withstand economic troubles.

• Setting up a government mechanism to seize and dismantle large institutions whose failure threatens the nation's financial stability.

• Requiring hedge funds, private equity companies and other private investment funds to register with the Securities and Exchange Commission (SEC).

• Setting up a comprehensive framework of regulation of the complex financial instruments known as derivatives, including a central clearinghouse for trades.

• Developing stronger requirements for money-market funds so increased withdrawals won't threaten the broader financial system.

Geithner's plan didn't advocate merging federal regulators. His predecessor, Henry Paulson, last year suggested the potential merger of the SEC and the Commodity Futures Trading Commission, as well as merging the Office of Thrift Supervision and the Comptroller of the Currency.

Wouldn't cover AIG

One surprise in the plan was what was missing: a call for federal regulation of the insurance industry, something Paulson thought was necessary, particularly in light of the colossal taxpayer bailout of American International Group (AIG).

In explaining the plan Thursday, Geithner told the House Finance Services Committee that "Our system is wrapped today in extraordinary complexity, but beneath all that, financial systems serve an essential and basic function.

"Financial institutions and markets transform the earnings and savings of American workers into the loans that finance a home, a new car or a college education."

But the system failed in fall 2008, and the government has had to staunch the bleeding with hundreds of billions of taxpayer dollars, including $182.5 billion in commitments to AIG.

"To address this will require comprehensive reform, not modest repairs at the margin, but new rules of the game," Geithner told the panel. The idea would be to gain some control over such lenders as failed Ameriquest Mortgage, once the nation's biggest subprime lender.

As a mortgage company that didn't have insured deposits, Ameriquest escaped any oversight by federal bank regulators, and instead was subjected to varying levels of scrutiny by California and other states. It took a coalition of 49 states' attorneys general to sue Ameriquest over predatory lending practices and win a $325 million settlement.

The plan's chances

There is broad support in Congress for major changes, especially for an agency to oversee systemic problems in the economy. The debate will focus on how stringent the rules will be.

Democrats, who hold majorities in the House and Senate, generally agree with the principles of President Obama's plan. But even they have their own ideas.

"It is a good first outline," said Sen. Charles Schumer, D-N.Y. "Clearly, it will require some major consolidating and rearranging of the existing agencies."

The plan will face Republican objections, particularly over concerns that it adds too much to the regulatory burden on a free market.

"Time after time in history, we've heard the promise that if we only had more regulations, we wouldn't find ourselves in the situation that we're in today," said Rep. Scott Garrett, R-N.J. "But the Federal Reserve (was) created to ensure that asset bubbles and panics — sort of like we have right now — don't happen. But they do."

Some hedge-fund managers groused. Several trade organizations said there is a need to modernize regulation and limit "systemic risk," but questioned the need for more rules.

"We believe that private equity investments do not create systemic risk," said the Private Equity Council, which represents firms such as the Blackstone Group and the Carlyle Group. "Private equity firms invest in companies, not exotic securities, and their investors are long-term investors, eliminating the 'run on the bank' type of risk that helped create the current financial crisis."

The council and others said they hoped to work with the Obama administration and Congress on regulatory changes. But opposition could flare as the plan's details are crafted.

"Any time you propose to do something this comprehensively, you're going to have various actors opposing pieces of it," said Robert Pickel, chief executive of the International Swaps and Derivatives Association.

Material from McClatchy Newspapers is included in this report.