The Treasury Thursday morning proposed sweeping new controls over the giant financial firms and huge unregulated markets whose breakdown led to the global financial crisis.
Big banks like Citigroup, Wall Street houses like Goldman Sachs and other financial firms like American International Group that have been considered too big to fail and have enjoyed massive federal bailouts would be subject to substantially more regulation, higher safety standards and stricter risk controls than smaller banks, under a scheme presented by Treasury Secretary Timothy Geithner to Congress.
Reversing the trend toward deregulation that has prevailed in the United States since the 1980s, the plan would subject markets that were previously exempted from oversight to stiff new regulatory controls. Powerful federal regulators — most likely at the Federal Reserve and Treasury — would have the authority not only to oversee the global activities of sprawling financial firms, but could seize them and close them down if their risky activities brought them to the point of failure, as occurred with AIG, Lehman Brothers, Bear Stearns and others last year.
“To address these failures will require comprehensive reform — not modest repairs at the margin, but new rules of the road,” said Mr. Geithner in testimony before the House Financial Services Committee. “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.”
Complex innovations like derivatives played a critical role in the credit crisis. Credit default swaps, in particular, which are a kind of insurance banks purchased on mortgages, were at the center of the crisis and reached a mind-boggling $70 trillion in value before imploding last year. These markets would be tamed by requiring all investors and traders to submit to formal trading regimens on official exchanges.
Shadowy and secretive financial companies like hedge funds, private equity funds and venture capital funds that have been able to operate under the radar scope of regulators in the past will be required to register and report about their activities to the Securities and Exchange Commission.
These powerful funds of wealthy investors, which frequently move markets with controversial trading activities such as short-selling the stocks of banks and other financial firms to reap profits, have vowed to fight any move to increase federal controls. The industry successfully fended off an attempt by the SEC several years ago to require them to register with the securities agency.
Mr. Geithner’s proposals received a warm welcome at the House Financial Services Committee, where chairman Barney Frank, Massachusetts Democrat, is working on legislation to establish many of the controls the administration is proposing. Like Mr. Geithner, Mr. Frank said his goal is to impose sensible regulations on the markets while trying to preserve the entrepreneurship and innovation that made Wall Street the leading light around the world.
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