Geithner Pushes Derivatives Plan

But He Warns Europe May Not Follow

Treasury Secretary Timothy F. Geithner urged lawmakers yesterday to pass the Obama administration's plan to regulate derivatives, the exotic financial instruments that exacerbated the financial crisis.

Geithner told a rare joint meeting of the House Financial Services Committee and House Agriculture Committee that it was crucial that, among other things, derivatives traders keep enough money in reserve to be able to meet their obligations.

American International Group sold many derivative contracts to cover losses on mortgage investments but was not able to pay out the money without tens of billions of dollars in government aid.

But Geithner acknowledged one risk to the administration's plan, given the interconnected and international nature of the derivatives market: Europe might not go along.

"There is a tendency in Europe to try to come up with a European solution to managing risks in these areas," he said. "I'm a little concerned that they want to come up with a separate approach."

Republicans expressed concern that the administration's plan could stunt financial innovation and end up costing U.S. businesses more.

Rep. Jeb Hensarling (R-Tex.) warned that companies would be less likely to use derivatives, which are often used to hedge against risks, if the costs are too onerous. "Less hedging can create less credit, and less credit can create fewer jobs," he said.

In just a few years, trading in derivatives -- which are essentially contracts between two investors betting on whether a stock, bond or other security will go up or down in value -- has mushroomed into the world's largest market, estimated to be in the tens of trillions of dollars.

Both the agriculture committee, which oversees commodities, and the financial services committee, which oversees markets and trading, have laid claim to oversight of derivatives. Yesterday, leaders of both committees expressed broad support for the Obama plan.

"We have expressed a willingness to work together to pass strong, comprehensive and consistent regulation of over-the-counter derivatives," said Collin C. Peterson (D-Minn.), chairman of the agriculture committee.

Separately, the Treasury Department yesterday moved ahead on another of its proposals: beefing up the Securities and Exchange Commission and tightening the rules on selling investments to consumers.

The legislation would give the SEC power to prohibit "sales practices, conflicts of interest and compensation schemes" among money managers that could encourage investors to put their money in unsuitable arrangements.

The legislation would also give the SEC power to pay whistleblowers who warn the agency about financial fraud. The SEC can only do that now for insider-trading violations; the problems such a limitation imposes were highlighted after it became known the agency had been tipped off to the Ponzi scheme orchestrated by Bernard Madoff.