U.S. Treasury Secretary Timothy Geithner said regulation of the U.S. financial system needs a broad overhaul to heal a crippling lack of confidence caused by the credit crisis.
"To address this will require comprehensive reform," Geithner said at a House Financial Services Committee hearing Thursday. "Not modest repairs at the margin, but new rules of the game."
Geithner's proposals would bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.
The Obama administration is counting on public anger over the taxpayer-financed rescues of American International Group Inc., Bear Stearns Companies and other firms to help it win approval for the changes, which could be the most sweeping since the 1930s. Policymakers want to improve the oversight of the financial system now, rather than wait until the crisis is over, administration officials said on condition of anonymity.
"We have a moment of opportunity now" and "we need to act," Geithner said. He also called for new standards for executive compensation practices "across all financial firms."
The administration's regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency's staff. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.
The strategy also would require derivatives to be traded through central clearinghouses. It would add new oversight for money-market mutual funds to reduce the risk of a run on those funds after a shock like last year's failure of Lehman Brothers Holdings Inc.
The Treasury chief also said regulators should consider new rules requiring banks to set aside extra reserves during boom times to build up a cushion for economic slumps.
