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US plans to rein in Wall Street US plans to rein in Wall Street
(about 2 hours later)
US Treasury Secretary Timothy Geithner is outlining far-reaching plans to strengthen government authority over the US financial system.US Treasury Secretary Timothy Geithner is outlining far-reaching plans to strengthen government authority over the US financial system.
The measures are designed to prevent the kind of systemic risk-taking among banks that has contributed to the current financial crisis.The measures are designed to prevent the kind of systemic risk-taking among banks that has contributed to the current financial crisis.
In his initial remarks, Mr Geithner told a US House Committee that a simpler system was needed. Mr Geithner told a US House Committee that a simpler, more effective regulatory system was needed.
He said government had not had "adequate tools" to handle the crisis. He said the government had not had "adequate tools" to handle the crisis.
'New rules''New rules'
"These failures have caused a great loss of confidence in the basic fabric of our financial system," Mr Geithner said in his prepared testimony. The treasury secretary said the existing financial system had "failed in basic, fundamental ways".
He said that "new rules of the game" were needed to achieve comprehensive reform, rules that "must be simpler and more effectively enforced". "These failures have caused a great loss of confidence in the basic fabric of our financial system," he said.
The treasury secretary said the financial system "needs to be subject to strong oversight by the government". He called for more openness and transparency.
He also talked of "unwise" risk-taking and a failure of "market discipline".He also talked of "unwise" risk-taking and a failure of "market discipline".
We need better, smarter, tougher regulation Timothy Geithner, US Treasury Secretary
"Regulated institutions held too little capital relative to the risks to which they were exposed," he said."Regulated institutions held too little capital relative to the risks to which they were exposed," he said.
Mr Geithner said that "new rules of the game" were needed to achieve comprehensive reform, rules that "must be simpler and more effectively enforced".
He said the financial system "needs to be subject to strong oversight by the government".
He also called for more openness and more transparency among financial institutions, and more integration among regulators.
New frameworkNew framework
Mr Geithner said: "We need better, smarter, tougher regulation." "We need better, smarter, tougher regulation," Mr Geithner said.
He outlined five elements of a plan to achieve this:He outlined five elements of a plan to achieve this:
  • Establishing a single entity responsible for stability among major institutions
  • Enforcing more conservative capital requirements for financial institutions
  • Forcing investment companies of a certain size to register with the Securities and Exchange Commission (SEC), the US financial regulator
  • Establishing a framework for derivative markets
  • Strengthening requirements for money market funds.
  • Establishing a single entity responsible for stability among major institutions
  • Enforcing more conservative capital requirements for financial institutions
  • Forcing investment companies of a certain size to register with the Securities and Exchange Commission (SEC), the US financial regulator
  • Establishing a framework for derivative markets
  • Strengthening requirements for money market funds.
Mr Geithner said that time was of the essence in implementing these five elements. As a result of these initiatives, hedge funds - investment funds that have been criticised for increasing stock market volatility and forcing some share prices down - would be subject to regulation.
The new system would also be designed to ensure that complacency resulting from the so-called 'too big to fail' syndrome, where companies assume the government will bail them out if necessary, would be eradicated, Mr Geithner said.
Strict capital requirements would be enforced, he added, so that risk taking would be curtailed.
'Moment of opportunity'
The treasury secretary said that time was of the essence in implementing these five elements.
"We have a moment of opportunity, we need to act," he said."We have a moment of opportunity, we need to act," he said.
He also stressed the importance of the international effort to reform the global financial system.He also stressed the importance of the international effort to reform the global financial system.
"We will work with the Europeans, we cannot move alone," he said."We will work with the Europeans, we cannot move alone," he said.
However, Mr Geithner did say there was a limit to how long the US could wait for global co-operation. He said the US had to look after its own interests.However, Mr Geithner did say there was a limit to how long the US could wait for global co-operation. He said the US had to look after its own interests.
"We cannot wait for consensus with the rest of the world [if that jeopardises US recovery]," he said."We cannot wait for consensus with the rest of the world [if that jeopardises US recovery]," he said.
'Catastrophic damage''Catastrophic damage'
Questioned as to whether there was an alternative to using taxpayer money to bail out financial institutions, Mr Geithner reinforced the government's argument that it had no choice.Questioned as to whether there was an alternative to using taxpayer money to bail out financial institutions, Mr Geithner reinforced the government's argument that it had no choice.
"There are circumstances where it's cheaper for the taxpayer over time for the government to take action. Letting certain financial institutions fail can cause acute, catastrophic damage [to every US citizen]," he said."There are circumstances where it's cheaper for the taxpayer over time for the government to take action. Letting certain financial institutions fail can cause acute, catastrophic damage [to every US citizen]," he said.