Published March 27, 2009

Geithner unveils sweeping overhaul of financial system

It's a rewrite of the rules and not a tinkering at the margins, he says

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(WASHINGTON) The US yesterday unveiled a far-reaching overhaul of the financial system in an effort to prevent a repeat of the banking crisis that toppled once-mighty institutions and wiped out trillions of dollars in investor wealth.

Treasury Secretary Timothy Geithner told lawmakers that the changes are needed to fix the flaws exposed by the current financial crisis, the worst to hit America in seven decades.

The goal is to repair a system that has proven 'too unstable and fragile,' he said. 'Over the past 18 months, we have faced the most severe global financial crisis in generations,' Mr Geithner said in testimony to the House Financial Services Committee.

'To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game,' he said.

The administration's proposal, which will require congressional approval, would represent a major expansion of federal authority over the financial system. It would impose tougher standards on financial institutions judged to be so big that their failure would represent a risk to the entire system.

It also would extend federal regulations for the first time to all trading in financial derivatives, exotic financial instruments such as credit default swaps that were blamed for much of the damage in the meltdown.

The administration also wants larger hedge funds to be required to register with the Securities and Exchange Commission. In addition, the administration proposed the creation of a systemic risk regulator to monitor the biggest institutions.

Mr Geithner did not designate where such authority should reside, but the administration is expected to support awarding this power to the Federal Reserve.

The plan also includes a measure that Mr Geithner and Fed chairman Ben Bernanke discussed before the committee on Tuesday to give the administration expanded powers to take over major non-bank financial institutions, such as insurance companies and hedge funds that were teetering on the brink of collapse.

That power was aimed at preventing a repeat of the problems surrounding insurance giant American International Group, which sparked a furore last week when it was revealed the company had distributed US$165 million in bonuses to employees of its financial products group. The unit specialised in trading credit default swaps, the instruments that drove the company to near-collapse.

'Let me be clear,' Mr Geithner told the committee. 'The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers must end.'

The administration, pushing for quick action on its reform agenda, sent Congress a 61-page bill dealing with the expanded powers to seize control of non-bank institutions on Wednesday. The House committee has indicated it could move on the measure as early as next week. -- AP