(Updates with quotes from Geithner on systemic risk regulator)
WASHINGTON, March 26 The following are highlights from the
House Financial Services Committee hearing with U.S. Treasury Secretary Timothy
Geithner on financial regulation reform on Thursday.
> For a story on Geithner's testimony, see [ID:nN26372443]
> For a factbox on U.S. financial regulations reform initiatives, see
> For a text of Geithner's prepared testimony, see:
GEITHNER ON MORAL HAZARD AND SYSTEMIC RISK REGULATOR
"We have to be very careful that what we are doing does not add to moral
hazard to the system. The regime has to come with clearly defined rules about
prompt corrective action, as what exists for banks, so that you can constrain
the discretion of the supervisor to let the situation slip to the edge of the
cliff without intervention. You have to have very high thresholds for a
judgment that would allow the government to put in capital, requires elaborate
checks and balances to limit the discretion there, too. And you have to look at
that along side what we are proposing to raise capital requirements."
GEITHNER ON CALLS TO BAN "NAKED" CREDIT DEFAULT SWAPS:
"I know there are strong opinions on this issue, so I say this with some
trepidation. My own sense is that banning naked (CDS) volumes is not necessary
and wouldn't help fundamentally in this case. It's too hard to 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
would have done that a long time ago across a whole range of financial
innovations, but it is terribly hard to do. But we will listen carefully to any
ideas in this area and understand why people feel so strongly about this.
"Our view is that the absolutely essential thing is that there is more
capital held against these positions so we never again face the situation where
those types of judgments could imperil the system."
GEITHNER ON SMALL BANKS:
"We are going to have to look carefully at how the cost of these
interventions are shared across the system. Right now in the current system,
it's fundamentally unfair because smaller banks are forced to absorb a
disproportionate cost of interventions to protect the system from ... mistakes
made by larger institutions. We would like to change that and put in place a
fee structure that is a bit more just and fair in that context.
GEITHNER ON COSTS OF INTERVENTIONS:
"As this crisis reveals ... there are circumstances in which it is cheaper
for the taxpayer over time and less damaging for the country over time for the
government to take some risk in preventing greater costs not just to the
deposit insurance fund but to the rest of the system. That's a balance we have
GEITHNER ON AID FOR AUTO, RV DEALER FLOORPLAN FINANCING:
"We're working on it. We've been looking at it very carefully over the last
several weeks. We're exploring a range of options. Can't tell you today whether
we've found a way to solve this, but we agree it's important. We think it would
be helpful as a part of the overall solution and I'd certainly be able to tell
you and your colleagues in the next couple days what we think is possible,
what's not possible."
GEITHNER ON LEVERAGE RATE:
The suggestion for that leverage really was what the FDIC suggested, based
on the ... experience they have with their existing mechanism. Now, it is
substantially less leverage than banks run with today. ... What we put forward
was a framework we think leaves the taxpayer much better protected than the
alternatives and we're trying again to stretch taxpayer resources prudently and
use private investment effectively. ....
"We want to get the balance right. We're not suggesting it's perfect.
Again, we want to free up credit flows."
GEITHNER ON FDIC
"What we're proposing to do is build on the model established for the FDIC
for banks and thrifts. That model we have a lot of experience with. There's a
whole range of important checks and balances that seem to limit discretion. So
the existence of this does not increase moral hazard.
"We're basically suggesting a model which would substantially rely on the
FDIC itself to run this new regime."
GEITHNER ON WORKING WITH EUROPE ON REGULATIONS:
"Our hope is that we can work with Europeans on a global framework, a
global infrastructure which has appropriate global oversight, so we don't have
a balkanized system at the global level, like we had at the national level."
GEITHNER ON INTERNATIONAL RISK:
"Financial products and institutions should be regulated for the economic
function they provide and the risks they present, not the legal form they take.
We can't allow institutions to cherry pick among competing regulators and ship
risk to where it faces the lowest standards and weakest constraints. And we
need to recognize that risk does not respect national borders. Markets are
global and high standards at home need to be complemented by strong
international standards enforced more evenly and fairly. Building on these
principles, we want to work with Congress to create a more stable system and
stronger tools to prevent and manage future crises."
REP. SPENCER BACHUS ON FOREIGN BANKS AND AIG BAILOUT:
"I have been informed that AIG is now attempting to force many of its
creditors that are U.S. banks to accept severe reductions of more than 70
percent on the total debt owed to them. This disparity in the treatment between
foreign banks which ... were paid dollar for dollar within hours of the bailout
and U.S. banks ... have yet to receive any payment and are being asked to
accept 70 and 80 percent haircuts, this disparity in treatment between foreign
banks and U.S. banks is very concerning to me. This morning I sent a letter to
the chairman regarding this development, and hope a hearing will be scheduled
... He has assured me that he will fully cooperate."
REPRESENTATIVE SCOTT GARRETT ON FDIC LIKE RESOLUTION AUTHORITY FOR NONBANK
"But I think this authority needs to be really carefully structured to
avoid a lot of unintended consequences. ... We could really end up doing a heck
of a lot more harm than good."
GEITHNER: FAILURE OF SYSTEM SHOWS NEED FOR NEW RULES:
"These failures have caused a great loss of confidence in the basic fabric
of our financial system, a system that over time has been a tremendous asset
for the American economy. To address this will require comprehensive reform.
Not modest repairs at the margin, but new rules of the game. The new rules must
be simpler and more effectively enforced and produce a more stable system, that
protects consumers and investors, that rewards innovation and that is able to
adapt and evolve with changes in the financial market."
GEITHNER ON KEY ELEMENTS OF PLAN:
"The key elements of our plan to address systemic risk are:
First, we need to establish a single entity with responsibility for
systemic stability over the major institutions and critical payment and
settlement systems and activities.
Second, we need to establish and enforce substantially more conservative
capital requirements for institutions that pose potential risk to the stability
of the financial system, that are designed to dampen rather than amplify
Third, we should require that leveraged private investment funds with
assets under management over a certain threshold register with the SEC to
provide greater capacity for protecting investors and market integrity.
Fourth, we should establish a comprehensive framework of oversight,
protections and disclosure for the OTC derivatives market, moving the
standardized parts of those markets to central clearinghouse, and encouraging
further use of exchange-traded instruments.
Fifth, the SEC should develop strong requirements for money market funds to
reduce the risk of rapid withdrawals of funds that could pose greater risks to
And sixth, we need to establish a stronger resolution mechanism that gives
the government tools to protect the financial system and the broader economy
from the potential failure of large complex financial institutions."