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Geithner to Propose Vast Expansion Of U.S. Oversight of Financial System
"The framework will significantly raise the prudential requirements, once we get through the crisis, that our largest and most interconnected financial firms must meet in order to ensure they do not pose risks to the system," Geithner said yesterday in a speech before the Council on Foreign Relations in New York.
Hand in glove with this expanded oversight, the administration also is seeking the authority to seize these large firms if they totter toward failure.
Under current law, the government can seize only banks.
The administration yesterday detailed its proposed process, under which the Federal Reserve Board, along with any agency overseeing the troubled company, would recommend the need for a takeover. The Treasury secretary, in consultation with the president, then would authorize the action. The firm would be placed under the control of the Federal Deposit Insurance Corp. The government also would have the power to take intermediate steps to stabilize a firm, such as taking an ownership stake or providing loans.
"Destabilizing dangers can come from financial institutions besides banks, but our current regulatory system provides few ways to deal with these risks," Geithner said yesterday. "Our plan will give the government the tools to limit the risk-taking at firms that could set off cascading damage."
The administration compared the proposed process with the existing system under which banking regulators can take over failed banks and place them under FDIC control.
One important difference is that the decision to seize a bank is made by agencies that have considerable autonomy and are intentionally shielded from the political process. Some legislators have raised concerns about providing such powers to the Treasury secretary, a member of the president's Cabinet.
The cost of bank failures is carried by the industry, which pays assessments to the FDIC. The Treasury said it has not yet determined how to pay for takeovers under the proposed system. Possibilities include dunning taxpayers or collecting fees from all institutions the government considers possible candidates for seizure.
FDIC chairman Sheila C. Bair issued a statement that expressed support for an expansion of her agency's responsibilities.
"Due to the FDIC's extensive experience with resolving failed institutions and the cyclical nature of resolution work, it would make sense on many levels for the FDIC to be given this authority working in close cooperation with the Treasury and the Federal Reserve Board of Governors," Bair said.
The administration also wants to expand oversight of a broad category of unregulated investment firms including hedge funds, private-equity funds and venture capital funds, by requiring larger companies to register with the Securities and Exchange Commission. Firms also would have to provide financial information to help determine whether they are large enough to warrant additional regulation.
Hedge funds were designed to offer high-risk investment strategies to wealthy investors, but their role quickly grew from one on the fringe of the system to a place near the center. Some government officials have sought increased regulation of the industry since the 1998 collapse of Long-Term Capital Management threatened the stability of the financial system.