Geithner outlined the administration's latest effort to revive and stabilize the recession-plagued economy, saying the regulatory changes must be made to fix flaws exposed by the current financial crisis.
"Over the past 18 months, we have faced the most severe global financial crisis in generations," he 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."Listen to Geithner's opening statement to the House panel:
The proposed changes would greatly expand the federal government's authority over the financial system. Tougher standards would be imposed on financial institutions judged to be so big that their failure would represent a risk to the entire system.
According to documents released by the Treasury Department, the new regulation proposal focuses on so-called "systemic risk" and revolves around a series of tenets:
Creating a single independent regulator with responsibility over systemically important firms.
Establishing higher standards on capital and risk management for systemically important firms.
Requiring all hedge funds above a certain size to register with the Securities and Exchange Commission.
Building a comprehensive framework of oversight, protections and disclosure for derivatives markets, including credit default swaps.
Strengthening the regulatory framework around money market funds.
Federal regulations would be expended for the first time to all trading in financial derivatives -- exotic financial instruments such as credit default swaps were blamed for much of the damage in the meltdown.
The Obama administration wants larger hedge funds to be required to register with the Securities and Exchange Commission.
Geithner also proposed the creation of a systemic risk regulator to monitor the biggest institutions. He did not immediately say which people or institution should hold that authority, but the administration is expected to support awarding this power to the Federal Reserve, the Associated Press reported.
The plan also includes a measure that Geithner and Fed Chairman Ben Bernanke discussed before the committee on Tuesday to give the administration expanded powers to take over major nonbank financial institutions, such as insurance companies and hedge funds. That power was aimed at preventing a repeat of the problems surrounding insurance giant American International Group Inc., which sparked a furor last week when it was revealed the company had distributed some $165 million in bonuses to employees of its financial products group. The unit specialized in trading credit default swaps, the instruments that drove the company to near-collapse last fall.
"Let me be clear," Geithner told the House 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."
Future regulatory pushes will involve protection of consumers, eliminating gaps in the regulatory structure and fostering international coordination, according to the Treasury Department.
The administration has pushed for quick action on its reform agenda and sent Congress a 61-page bill dealing with the expanded powers to seize control of nonbank institutions late Wednesday. The House committee has indicated it could move on the measure as soon as next week.
However, it was unclear how fast the rest of the financial reform agenda might move through Congress. On Thursday, Geithner provided only a broad outline of the other proposals. Many details will need to be worked out.
Hedge funds, which are large pools of capital holding an estimated $1.5 trillion in assets, operate mostly outside of government supervision. As the market crisis deepened last fall, hedge fund selling was cited as one of the reasons for increased volatility that pounded stocks and bonds. Last year, hedge funds suffered huge losses, notably from investments in securities tied to subprime mortgages.
For years, the hedge fund industry has fought federal regulation, but lawmakers and policy makers are increasingly worried that hedge funds have become too big a part of the financial market to operate without government monitoring, the New York Times reported.
Leon Cooperman, a longtime hedge fund manager in charge of Omega Advisors, said new regulations are not needed, adding that he found the call for new rules to be mere finger-pointing.
"I'm already heavily regulated," Cooperman told the Times, saying that his fund was subject to oversight from the SEC, the Commodity Futures Trading Commission, the Federal Reserve and other organizations.
The Obama administration's outline of regulatory reforms comes a week before President Barack Obama is scheduled to meet for discussions among the Group of 20 major industrialized and developing countries in London to assess what needs to be done to deal with the global financial crisis.
His administration has pushed other nations to follow the U.S. lead to enact sizable economic stimulus programs to jumpstart global growth. But many in Europe are resisting those calls and arguing that the United States needs to do more to toughen financial regulations because they believe the current troubles can be traced to lax regulation in the United States.
The Bush administration resisted calls for tighter regulations in these areas but the Obama administration has signaled a willingness to do more and is hoping that the flaws in current regulations that were exposed by the financial crisis will spur Congress to act.