Treasury Secretary Timothy Geithner is laying out his regulatory restructuring plan today for the House Financial Services Committee. His proposal focuses on getting too-big-to-fail institutions under control. It would give the Federal Deposit Insurance Corp. the authority to seize and dismantle failing financial firms deemed systemically important by the Federal Reserve Board. BankThink brings you Geithner´s testimony and the committee members´ questions live.
Today´s live blog will use reverse chronology. The newest bulletins will appear at the top. To read about the hearing from the beginning, scroll all the way down to the bottom of the page and read up.
1:20pm: Hearing adjourned.
1:18pm: Rep. Emanuel Cleaver, D-Mo., is back on asset pricing in the toxic asset relief plan. How to do it? And how to handle the settlement process transparently? Geithner: The FDIC will explain it. "They do this for a living."
1:18pm: Frank says there will be no regulation of insurance rates.
1:16pm: Manzullo: "Before you came out with this plan you should have had some idea of the number of companies that would be subject to this regulation...Do you realize how radical your proposal is?" Geithner: "It's prudent and carefully designed--" Manzullo: If it were, you would have answers to my questions.
1:13pm: Rep. Donald Manzullo, R-Ill., is pointing out that the Fed could have done more to reign in risky mortgage lending, "yet they did not act...You are wanting to start yet another powerful federal agency and give it additional powers" but the already existing agencies didn't actually act when they needed to. "I'm not asking for an answer." But now you want to set up this even more powerful regulatory system, "how many entities could you envision having to be in a position where they could be seized because of their size?" Geithner: "I have no answer to that question..." there have to be broad standards for determining systemic risk.
Waters: "I wish that some deeper thought would go into not allowing some products to come on the market rather than talking about regulating EVERYTHING."
Geithner: We couldn't but it wouldn't be a good idea. "If you just ban them, something else would just develop like that."
1:11pm: Waters: "Credit-default swaps: Why can't we just eliminate them?"
Geithner: I will get the FDIC to explain that to you.
Waters: Also, FDIC has a guarantee program, and the banks are doing their own underwriting. Is that unusual?
1:10pm: Waters: "I'm concerned about women-owned and minority-owned businesses." Why cant minority firms be involved in the asset management program for toxic securities? Geithner says he'll look into it.
Waters: We should look at products before they come on the market. Tell consumers that this product "may be hazardous to your economic health."
Geithner: "People always innovate around what the government prohibits...the more effective way to regulate is to make sure the institutions are strong enough to weather a big storm and that people are protected.
1:07pm: Rep. Maxine Waters, D-Calif., says Geithner he's "holding up well." Then she asks why "we don't talk about the elimination certain products...why don't we talk about Alt-A. Why is Alt-A a good product? What about credit-default swaps?"
Frank: We'll at least have the industry groups in for a hearing.
Geithner: You can't "let the regulated be part of the regulator."
1:01pm: Rep. Judy Biggert, R-Ill., is picking up on Castle's suggestion for the systemic risk council. "It seems like so much of our problem was the fact that the regulators didn't really catch it and it could have been a lot of regulators and they didn't communicate with each other." How about making it a private-public partnership? Agencies, and also industry groups?
Kanjorski: How about pushing through legislation to establishing an office of insurance information quickly? Geithner: Sounds good to me.
Geithner: "I think there is a good case for introducing an optional federal charter for insurance."
12:58pm: Kanjorski is pointing out some vagueness in Geithner's proposal. He wants to know how existing jurisdictions will be affected by the new systemic risk regulator and resolution authority. Particularly with insurance regulation. Will it go federal?
Geithner replies that deposit insurance is a worldwide phenomenon. Paul interrupts him and demands an answer for how the nation is expected to assume that regulators are correct when they accuse a financial firm of doing something wrong. "I don't think it's complicated to think about the principle of 'innocent until proven guilty,'" Paul interjects.
12:55pm: Now Paul is saying that the burden of proof is on the regulators to show how financial firms broke the law. How does anyone even know?
Paul: If we had regulations on the press, we would call it prior restraint and we would be outraged. If we had regulations on personal behavior we would be outraged. But with economics we willingly submit...I challenge the whole system.
12:52pm: Rep. Ron Paul, R-Tx., says he's skeptical of regulations. What's new?
12:49pm: Rep. Walt Minnick, D-Idaho: "I am concerned that, given the need for capital which financial institutions of all types need to become functional, that this regime not underprice these assets" in the toxic asset plan. "If your initial auctions produce values that are at the low end of a fair price," will you provide additional leverage for the purchases of the assets? Geithner says the risks of providing more leverage would outweigh the benefits.
12:42pm: Rep. Edward Royce, R-Calif., says the resolution authority would be very powerful. "We have to be very clear so people would know what to expect." What would Geithner have done with AIG if he'd had that authority? Geithner: The proposed authority allows one to intervene and wind down the entity OR recapitalize the institution if its failure would cause too much damage. In any of the cases that already occurred, "you'd have to look at the state of the world at that point." ...Is he saying he wouldn't have done anything differently in the case of AIG? Because on Tuesday he said that the actions the government took on AIG were a result, in part, of the lack of authority to resolve the company.
Geithner: "The great virtue of a capital requirement is that it constrains the amount of risk an institution is allowed to take."
Grayson continues to press about the cutoff for systemic importance. Geithner names qualities: Size, interconnectedness.
12:40pm: Grayson asks Geithner how to assure a future absence of taxpayer bailouts and Geithner replies, "Capital, capital, capital."
Grayson seems to be asking what the cutoff is for systemic risk intervention. He's used the example of the GSEs, and Geithner is engaging specifically on Fannie and Freddie. He says they didn't have an appropriate overseer with conservatorship powers until last summer. Grayson concludes that if there were such an authority for all large financial institutions, it should mean there would be no more need for taxpayer bailouts.
12:37pm: Florida Democrat Alan Grayson asks why AIG was allowed to built up its risk so much in the first place. Geithner says "there was really no competent regulator" overseeing the firm.
12:34pm: Geithner: There's a question of who should be responsible for the systemic core responsibilities in the system. There are a range of issues we have to consider:
1. It should not be the Treasury2. It should not be in an independent agency3. It's best to "build on the existing authorities we have for holding companies under the current statute"4. It must be able to move "very very quickly in extremis"
Geithner replies: The decisions involved in resolving an institution that you definitely can't rely on just one institution, that's for sure. The FDICIA structure is a good template for this new resolution authority. We need cooperation across regulatory authorities.
12:31pm: Rep. Michael Castle, R-Del., suggests a "systemic risk council" instead of having one agency take all of the responsibility. Castle says he's worried about potential conflicts of interest for the Fed if it were to assume systemic risk oversight. It's important that "careful thought is given to being inclusive." Perhaps AIG wouldn't have mismanaged themselves so badly if they'd had some warning.
12:30pm: The committee reconvenes.
11:36am: The committee is taking a recess to vote.
11:31am: Rep. Mary Jo Kilroy, D-Ohio, wants to know how the regulatory restructuring plan "will help Main Street." Geithner: "This will make our system more stable in the future, with better protection for consumers and investors." [A bold statement, in BankThink's opinion, considering there are not specific consumer protections in the plan].
Garrett has asked whether designating firms as systemically important would create a new form of moral hazard similar to what happened to the government-sponsored enterprises. Geithner says it's a risk, but one worth considering.
Garrett now points out that the FDIC, with its DIF, is trying just to protect depositors in banks. But with a resolution authority and an insurance fund that oversees big firms, there are many more types of participants that need protection.
Garrett is now asking whether, if the government had the power to unwind big companies earlier, Fannie Mae and Freddie Mac would have done something differently (or possibly been taken over). Geithner says it would have been better to have taken them over sooner.
11:22am: Donnelley asks Geithner to consider banning naked CDS. Geithner says it might not be necessary--it would be better to simply increase the capital requirements on companies engaging in CDS contracts.
11:20am: Rep. Joe Donnelley, D-Ind., wants to know whether floor plan financing for auto dealers will get government support. Geithner says: We're working on it.
11:19am: Bachus: "What was paid off, dollar for dollar, were these risky credit default swaps," Bachus is saying. But loans to AIG aren't being repaid. "Do you understand my concern?" Geithner: I need to look at that situation more closely.
Bachus: I think the "such sums as are necessary" is too open-ended.
11:15am: Why does your draft legislation allow the resolution authority to spend an unlimited amount of money to resolve a big financial institution? Geithner: It's complicated. We have to look at how to share the costs, but the current system is "fundamentally unfair" because it unfairly burdens smaller institutions.
It seems that Bachus, like many of his colleagues, does not fully understand the FDIC Deposit Insurance Fund and its structure. Bachus: "Is there really no alternative than saddling future generations of Americans with perhpas hundreds of billions of dollars worth of losses from the failure of just a few institutions?"
Geithner admits that many smaller banks are "bearing the burden" created by large banks' deleveraging processes.
Klein: Why should the too-big-to-fail institutions get Tarp money with such ease while smaller banks don't have the same access to help? Also, why can't antitrust laws that prohibit the growth of companies that produces "adverse consequences" be called upon in too-big-to-fail situations?
11:11am: Rep. Ron Klein, D-Fla., says the toxic asset funds need to be built transparently. Geithner agrees.
11:09am: Frank says that the committee will hold a hearing after the Easter break that brings together all regulatory agencies involved in the new systemic risk and resolution authority proposal.
11:06am: Geithner, in response to a concern raised by Marchant, says that banks selling toxic assets would get a six-month window in which to recapitalize themselves if the sale of assets required more writedowns.
11:03am: Rep. Kenny Marchant, R-Tx., asks, "given the levels of ratio involved" in the public-private partnership plan, aren't taxpayers more severely exposed than the large private investors that are getting ready to participate in the plan? Geithner replies: "This is a better way of protecting the taxpayer than the alternatives."
11:01am: Rep. Keith Ellison, D-Minn., asks how consumer protections fit in to the Treasury's regulatory restructuring plan. Geithner demurs. Ellison asks about his views on Elizabeth Warren's idea for a financial products safety board and Geithner calls it "interesting."
11am: Geithner: "We did not propose to establish capital requirements on hedge funds...we want them to register with the SEC if they reach a certain scale."
10:57am: Rep. Leonard Lance, R-N.J., is asking whether global coordination is required for various regulatory restructuring initiatives, such as brining credit-default swaps onto a central clearing platform. Geithner replies that international coordination definitely helps.
10:55am: Frank, in response to Green's fox-in-henhouse comment, says "I've been watching TV some, and I believe he's right."
Green is talking about hedge funds managing money for pensions. "I'm not sure that they [the people with money in pension funds] understand what it means to have their monies associated with a hedge fund." He adds, we cannot allow the naysayers from preventing us from doing what is right for the country. Geithner agrees: "We need to act...we need to move."
Green: "In a metaphorical sense, the foxes have raided the AIG henhouse, and the foxes don't want us to secure the henhouse!...It's our job to secure the AIG henhouses of the world."
10:50am: Rep. Al Green, D-Tx., is worried "That we may analyze to the point that we become paralyzed" and don't actually implement any regulatory reforms. Long Term Capital Management's failure in the 1990s should have prompted a review of systemic risk regulation, but "we became paralyzed."
Geithner points out that until Congress passed the bailout bill, the executive branch had no authority to recapitalize financial institutions. "This would be less costly for the taxpayer if we had the ability to address it now." He seems to be suggesting that the resolution authority should be granted quickly.
Geithner: They need to be viewed together, but we'll work with Congress on how to handle this.
Campbell: When should the receivership authority be established--now? Before we have a new systemic risk regulator?
10:45am: Rep. John Campbell, R-Calif., changes the subject. He wants to know why Geithner's toxic asset fund plan allows for a six-to-one debt-to-equity ratio. Geithner replies that the FDIC came up with the number.
Geithner: We jhst have to give the SEC more power.
10:42am: Scott: How do we respond when the financial institutions that we want to regulate say they already ARE regulated?
Geithner: What we need is better, smarter, tougher regulation. We have an enormously complicated system. It just did not deliver what it has to deliver. We need effective, consolidated supervision. But that doesn't mean we'll take away states' authority over insurance companies.
10:39am: Rep. David Scott, D-Ga., says "we certainlty don't want to suffocate our economy" in the rush to save it. For example, why take insurance regulation away from the states?
Geithner says the new regulatory regime needs:
1. A single entity responsible for systemic stability2. Greater capital requirements for systemically important institutions3. The requirement that leveraged private investment funds must register with the SEC4. A comprehensive oversight system for over-the-counter derivatives5. A way to reduce the risk of rapid withdrawal of funds6. A resolution authority for large complex financial institutions
Geithner: Systemic stability issues will be at the center of the Group of 20 meeting of leaders next week.
Geithner: I want to focus on "the substance of reform" rather than who should be responsible for which tasks.
10:33am: In his opening statement, Geithner calls for "simpler, more effective" rules to handle systemic risk. The system itself has to be strengthened to "withstand the failure of one or more" large institutions. "We need to recognize that risk does not respect national borders," he adds.
10:28am: Rep. Scott Garrett, R-N.J., opens his remarks by asking Geithner why he said he'd be open to replacing the dollar with a new international currency. Then he quotes former Treasury Secretary Paul Volker's statement that regulatory restructuring can't be carried out in a piecemeal fashion. Then he says more regulation won't necessarily help, anyway. For example, the Fed was created to prevent the formation of asset bubbles, and FDICIA was passed to tighten banking regulation, but neither move prevented asset bubbles or wayward behavior by banks.
10:24am: Rep. Paul Kanjorski, D-Pa., apporves of the general plan, but says creating a new regulatory structure will take patience.
10:23am: Bachus says there are "many more unanswered questions." He fires off a list:'How will systemic importance be determined?' Is one. He also warns that Congress shouldn't rush on regulatory restructuring.
Now Bachus has moved on to regulatory restructuring. "It is essential that any new regime...not rely on taxpayer funding." But the administration is considering using taxpayer funding to pay the cost of resolving these financial firms. "This...would promote moral hazard." Also, leaving the decision up to the Treasury secretary and the FDIC doesn't seem prudent.
10:19am: Rep. Spencer Bachus, R-Ala., the committee's ranking Republican member, has begun his remarks. He's speaking directly to Geithner, referring to Geithner's Tuesday testimony on AIG. "AIG is now attempting to force its US creditors" to take a 70% haircut on some of its obligations to them. "US banks, many of them taxpayers who funded this bailout, have yet to receive any payment...this disparity in treatment between foreign banks and US banks is very concerning to me."
Frank: It's better to keep a financial firm from becoming overleveraged, "with inadequate resources," than to allow institutions to get too big to fail and then dismantle them.
10:13am: Rep. Barney Frank, D-Mass., has begun his opening statement. "We have long had in our laws an adaptation of bankruptcy to deal with failed banks," Frank is saying, and their failures have since been easier to handle than the failures of non-bank institutions.