WASHINGTON — Treasury Secretary Tim Geithner used a hearing Thursday on the causes of the financial crisis to make a final push for regulatory reform, and indirectly criticized one of the bill's most contentious measures.

Speaking to the Financial Crisis Inquiry Commission as the Senate debated the bill, Geithner appeared to target a provision that would force banks to spin off their swaps desks, saying that trying to isolate banks from risk was counterproductive.

"To create stability, some argue, we should just separate banks from 'risk,' " he said. "But, in important ways, that is exactly what caused this crisis. The lesson of this crisis, and of the parallel financial system, is that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation."

Geithner did not explicitly mention the provision, written by Senate Agriculture Committee Chairman Blanche Lincoln, but his comments clearly seemed directed at it. Under Lincoln's provision, any bank that receives federal assistance, including deposit insurance and access to the Federal Reserve Board's discount window, must keep its swaps desk separate from its bank. The provision is designed to ensure derivatives activity does not threaten the bank, but federal regulators have said it will instead force derivatives trading into less well-regulated parts of the economy.

The Treasury was thought to oppose the provision, but has not commented publicly. Other regulators, including the Fed and Federal Deposit Insurance Corp., have played a much more active role in trying to remove or soften it.

Though the hearing was focused on how the shadow banking system contributed to the crisis, Geithner used most of his comments to plug regulatory reform, saying it would increase leverage limits, create a systemic-risk regulator, give the government resolution powers over big banking companies and regulate derivatives.

"No regulator or supervisor had the core mission of looking across the financial system and taking action to prevent the diversion of activity away from the protections regulations were designed to provide," Geithner said. "The result was a system that applied safety and soundness regulation only to banks and was unable to protect the safety and stability of the broader financial system."

But panel member Bill Thomas said Geithner could have done more when he was president of the New York Fed in the early stages of the financial crisis.

"Given those areas that you did have responsibility over, the old-fashioned commercial banks, Bank of America, Morgan Chase, Citibank … there were no firewalls anywhere," he said.

Geithner again defended himself by pushing for reform.

"We didn't have the tools to prevent the fire from jumping the firebreak, infecting the system," he said. "And these reform proposals Congress is debating — I know that's not the subject of your hearing — are designed to provide exactly those tools, to make sure that large, complex institutions like AIG manages itself to the edge of failure, you can put them out of their misery safely."

Geithner was backed by former Treasury Secretary Henry Paulson, who advocated for key portions of the reform bill, including a push to add risk-retention requirements to securitizations. Under the bill, originators would have to maintain at least 5% of the credit risk of a loan they sell to the secondary market.

"It's important that those who underwrite securitizations have some skin in the game," he said.

But a large part of the hearing focused on whether Paulson or Geithner had any regrets.

"I do not believe we are powerless," Geithner said. "If the government of the United States had moved more quickly to put in place better-designed constraints on risk-taking that captured where there was risk in the system, then this would have been less severe. And if the government had moved more quickly to contain the damage, I think the crisis would have been less severe, as well."

Paulson said: "I think my mistakes were primarily communications mistakes. And I hardly know where to begin there, because, you know, just start with the Tarp. … I was never able to explain to the American people in a way in which they understood it why these rescues were for them and for their benefit, not for Wall Street."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.