The Obama administration has announced plans to impose greater regulation and oversight on financial markets to reduce systemic risk and avoid a repeat of the current financial meltdown. Treasury Secretary Timothy Geithner announced more details of the plans in a congressional hearing.
The plan, which includes a proposal to create a new regulating authority to monitor risk in the financial system, has been long in preparation and the subject of discussions between lawmakers and the administration.
Secretary Geithner told the House Financial Services Committee Thursday that it has become clear there is a need for better and tougher regulation in a complex and flawed financial system.
"Comprehensive reform, not modest repairs at the margin, but new rules of the game. And the new rules must be simpler and more effectively enforced," he said. "They must produce a more stable system, one that protects consumers and investors, rewards innovation and is able to adapt and evolve with changes in the structure of our financial system."
The plan would extend federal government supervision to hedge funds and other investment houses that package sometimes risky and exotic investments. The rules would require the investment houses to register with the Securities and Exchange Commission if their assets exceed a yet to be determined size. Similar rules are already in place to regulate banks.
Also proposed is greater control and oversight over complicated financial transactions like credit default swaps, which played a major role in the collapse of companies such as American International Group (AIG).
Earlier this week, Secretary Geithner and Federal Reserve Chairman Ben Bernanke also discussed with Congress another step which would enable the government to take control of major non-bank financial institutions threatened with collapse.
House Financial Services Committee chairman Democrat Congressman Barney Frank has taken a lead role in working with the administration on regulatory reform.
"There are problems, as there were with the trusts or with the stock market, when there are no rules," he said. "Our job is to craft rules, as did Theodore Roosevelt, Woodrow Wilson and Franklin Roosevelt, that allow the society to get the benefit of these wonderful value-added financial innovations, while curtailing some of the abuses."
Republicans on the financial services committee, including Representative Scott Garrett, voiced concerns that greater regulation may not be effective.
"How can we possibly assign powers to a systemic regulator if we have not fully examined the appropriate roles for the existing regulators? And even more fundamentally than that, before we get too far down the road of fixing certain problems, how do we do so before we actually identify what those problems are," asked Garrett.
Republican Spencer Bachus voiced another Republican concern about the Obama administration's proposals for dissolving failing institutions.
"By creating this process [by] which non-banks whose failure would have systemic consequences could be wound down in an orderly fashion, we would restore balance and force firms to face the consequences of their actions," he said. "However, it is essential that any new regime for resolving or liquidating non-banks not rely on taxpayer funding."
Texas Democrat Al Green said the proposals Geithner outlined do what is necessary to prevent the failure of large institutions from devastating the economy.
"You are doing the right thing because the American people understand that too big to fail is the right size to regulate," he said.
Treasury Secretary Geithner said the Obama administration will continue working with House and Senate lawmakers on details of the proposal as it moves into final legislative form.
Geithner said President Obama will use his talks with other world leaders at the G-20 summit in London next week to underscore the need to raise regulatory standards globally.