Treasury Secretary Timothy Geithner's New Rules for the Financial Industry
Thursday, March 26, 2009SUSIE GHARIB: Treasury Secretary Timothy Geithner today proposed a sweeping overhaul of the U.S. financial system. Testifying before the House Financial Services Committee, Geithner told lawmakers the nation needs new rules for the financial industry. They include: Federal regulation of hedge funds, private equity and credit default swaps; a single regulator with authority over non-bank financial firms such as AIG; greater Federal authority to take over and wind down failed firms. And as Darren Gersh reports, the Obama administration would also like new protections for money market investors.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was not the most exciting thing in Treasury Secretary Timothy Geithner's testimony, but it is the one that could affect the most investors.
TIMOTHY GEITHNER, TREASURY SECRETARY: The SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.
GERSH: Long considered one of the safest and most boring investments, money market funds had their moment in the headlines after Lehman Brothers failed, as Federal Reserve Chairman Ben Bernanke explained on Tuesday.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Lehman's default on its commercial paper caused a prominent money market mutual fund to break the buck and suspend withdrawals, which in turn ignited a general run on prime money market mutual funds, with resulting severe stresses in the commercial paper market.
GERSH: The SEC wants to keep that from happening again. It plans to require funds to hold investments with higher credit quality and maintain large positions in securities that are easy to liquidate. The industry supports those reforms and has also called for rules requiring funds to know whether they are overly exposed to the investment decisions of a few big clients. And in the worst case scenario, the Investment Company Institute's Brian Reid says funds should have greater powers to freeze withdrawals and if necessary, liquidate in an orderly manner.
BRIAN REID, CHIEF ECONOMIST, INVESTMENT COMPANY INSTITUTE: And so the goal would be here to help a fund manager, give them more tools along with the approval of the fund's board to be able to contain a particular event in a fund to keep it from spreading to other funds.
GERSH: The Obama administration is pushing hard to create a single regulator that can head off systemic risks posed by money market funds and other large financial instruments. SEC Chairman Mary Shapiro is concerned that could undermine protections for individual investors.
MARY SHAPIRO, CHAIRMAN, SEC: My fear is that a systemic risk regulator and systemic risk concerns will always trump investor protection and given the structure of our markets and the broad participation of the public in our markets, that would be a terrible result.
GERSH: In return for greater safety, money market fund investors might have to settle for slightly lower returns once markets return to normal. But the hit will be small, perhaps as little as 0.1 of 1 percentage point. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
