WASHINGTON — Treasury Secretary Tim Geithner spent three hours Thursday giving Congress more details of his vision for regulatory reform but managed to evade the central question.
Though pressed several times, Geithner did not specify which agency should oversee companies judged to pose a systemic risk to the economy.
The easy answer appears to be the Federal Reserve Board — and the Treasury proposed this week to let the central bank determine which companies pose systemic risk — but Geithner pointedly avoided committing himself to the Fed.
Instead, he said, the Treasury is open to different approaches, and he reiterated the danger of giving one agency too much power.
"We are open to looking at a range of suggestions for how that authority should be framed and where that should be lodged in the system," Geithner said. "It needs to be vested in an independent supervisory authority. I do not believe it should be pulled together in one independent agency. I think too much concentrated power for all that regulatory authority would be not a sensible thing for the country."
Geithner's response is probably at least partly political. Though House Financial Services Committee Chairman Barney Frank has endorsed giving the Fed systemic-risk oversight, Senate Banking Committee Chairman Chris Dodd and Sen. Richard Shelby, the panel's lead Republican, have expressed reservations about the central bank.
Exactly what other possibility Geithner has in mind is unclear. He ruled out considering the Treasury for such a role and cast doubt on the effectiveness of an oversight board.
"You know, in a fire, the fire station needs to understand the neighborhood," he said. "It needs to know the neighborhood it's operating in. And you don't want it to have to convene a committee before it can get the engines out of the station."
Some lawmakers have also suggested creating a regulator to handle this responsibility, but Frank and other lawmakers have said it would take too much time.
Republicans, meanwhile, used the hearing to attack Geithner's plan, which would also give systemic resolution powers to the Federal Deposit Insurance Corp. GOP members argued that, by identifying which institutions were systemically important, the Treasury would essentially designate them "too big to fail."
"If the entities that are subject to this authority were seen to be too big to fail, without clear signals indicating what the consequences are for the creditors and the counterparties, we could really end up doing a heck of a lot more harm than good," said Rep. Scott Garrett, R-N.J. "So forgive me if I'm still a skeptic when I hear, 'if we only have a systemic regulator that this will never happen again,' especially if moral hazard is institutionalized with an entire new designation of systemically important institutions. We will only be encouraging that it will happen again in some future time."
Geithner acknowledged that the plan could create moral hazard but said there is no other choice.
"I don't see any other way to do it because market discipline alone is not going to fix the problem," he said.
Rep. Donald Manzullo, R-Ill., insisted that granting resolution and regulatory authority would be "radical" — a description disputed by both Geithner and Frank.
The Massachusetts Democrat said resolution authority is no different than the powers the FDIC already exercises over banks.
"The notion that this is radical that we seize private companies — apparently the initials FDIC mean nothing to Mr. Monzullo," Frank said. "The FDIC has been doing that for years. What … the FDIC does is to make it cheaper, so it's a way to avoid getting into that situation. It's a way to avoid bailing them out."
He also dismissed the notion that a systemic risk regulator would create risk.
"The purpose of this is to prevent companies from getting in trouble in the first place," he said. "A systemic risk regulator is to stop there from being excessive leverage. It is restricting 100% securitization. Having outgoing perverse incentives that give people who run the company a bonus if they make money and no loss if they lose money … , the bulk of what we are talking about is to prevent this."
Frank said he expects Congress to move resolution authority legislation in April or May, with broader systemic risk oversight to come under consideration this summer.
Most of the debate would focus on what agency assumes systemic-risk powers, he said.
"The debate will be how to do it and who does it, and those can be tricky," he said. "It includes not just a new systemic-risk regulator but [also] increased attention to the ability of the existing prudential regulators to do their job, to do investor protection, to do consumer protection."
Under legislation proposed late Wednesday by the Treasury, the FDIC and Treasury would jointly decide whether to assist or seize a failing systemically important institution. The FDIC would have the power to give financial assistance or place the company into conservatorship or receivership.
Some Republicans raised questions about whether the bill was giving too much power to the FDIC.
"That's a pretty extreme authority of receivership," said Rep. John Campbell, R-Calif., "and if you have that authority without the complete information and perspective of a full regulatory framework, wrong decisions could be made."
But Geithner said enough checks and balances are built in to avoid risks.
"What we're proposing to do is build on the model established for the FDIC for banks and thrifts," Geithner said. "That model, we've had a lot of experience with it … . We're basically suggesting a model which would substantially rely on the FDIC itself to run this new regime. But you have to have some checks and balances in the system like that system has, and so you don't want to vest in any individual any single institution such broad power."
Under the Treasury bill, the FDIC must consult with the Fed and the company's federal regulator before seizing an institution.
The resolution powers would cover the holding companies and subsidiaries of banks, thrifts, insurers, any broker-dealer registered with the Securities and Exchange Commission and any future commission merchant or commodity pool operator.
Geithner also called for boosting the capital requirements on all systemically important financial institutions and imposing additional liquidity, counterparty and credit risk management requirements.
The Treasury chief also recommended the regulation of credit default swaps and other over-the-counter derivatives, and he suggested that the SEC strengthen its regulation of money market funds to reduce credit and liquidity risk.
Hedge funds above a certain size should also register with the SEC, Geithner said.