This morning Treasury Secretary Timothy Geithner will answer questions from the Senate Banking Committee on the Obama Administration´s new regulatory restructuring plan and BankThink will be keeping you up today with a live blog of the hearing. Watch for some tough grilling on the proposal to give the Federal Reserve the power to monitor and regulate systemic risk. The committee members have been particularly resistant to the idea of giving the Fed more power, and several of them
9:35am: Sen. Chris Dodd, D-Conn., is giving his opening remarks. He says consumer protection must be "an urgent priority" and adds that the new independent consumer protection agency makes sense.
9:42am: Sen. Richard Shelby, R-Ala., the committee's ranking member, has begun his opening remarks. Dodd ended his with a call for cooperation. But Shelby has begun with a warning on the possiblity of failure to act "on this unique opportunity" if things move too fast. Shelby is asking Geithner to share "any and all documents" used to analyze the financial crisis and come up with a plan for reg restructuring.
9:45am: Shelby: "We have spent very little time discussing the concept of systemic risk...and whether it can be regulated at all."
9:46am: Shelby's moved on to concerns about the Fed. Could it be insulated from political influence if it were the systemic risk regulator? Could it handle the multiplicity of tasks? Could it oversee non-banks?
9:48am: Shelby: "I hope that we will not allow the administration's recommendations to limit the discussion we are about to have..."
9:50am: Geithner has begun his opening testimony. He seems distracted as he reads his speech--he has lost his place a few times already. Is this all hum-drum for him already?
9:51am: Geithner: "Our economy was brought too close to the brink to let this moment pass." He says of the plan: "We made the judgement that now was the time to pursue the core reforms" of the financial system.
9:52am: Geithner is saying that the solution to the former patchiness of the regulatory system is the creation of a systemic risk regulatory system, consisting of a council and enhanced powers for the Fed. He touts the committee's importance as a monitor and information gatherer, but adds, "you can't convene a committee to put out a fire." He argues that the Fed needs some authority so it can act quickly when problems arise. He is definitely taking the committee's wariness into account: He notes that while the proposal would give the Fed new powers, it would also take some away.
9:55am: Geithner says stronger protections against risk will foster innovation, not stifle it.
9:58am: Firms will have higher capital requirements, Geithner says. This should also help reduce moral hazard.
9:59am: Geithner has finished with his opening statement and Dodd has begun questioning him. Dodd starts off with a question about consumer protection in the mortgage industry: Would the administration be willing to work with the committee on more reforms of the mortgage industry?
Geithner: Yes.
10:01am: That last question was just a warm-up pitch. Now Dodd is quoting an academic who likened giving the Fed more power to parents giving their son a bigger, faster car right after he has crashed his old one. "Could it not conflict with their fundamental responsibility of conducting monetary policy?" Dodd asks.
Geithner: Other central banks throughout the world have more than one role. "If you look at the experience of countries in the financial crisis who have taken away responsibilities from their central banks," Geithner adds, they seem worse off. He seems to be comparing giving the Fed power with only one alternative: a committee.
10:04am: Geithner: Also, our proposal is modest--we are only giving the Fed slightly more power. Gramm-Leach-Bliley gave the Fed almost enough power, but still required that the agency consult with other regulators before taking certain actions. The Fed needs more freedom to decide and act quickly.
10:06am: "I don't think there is any regulatory or any supervisor in our country" that doesn't share some blame for the financial crisis. But the Fed's hands were tied. It couldn't act at the appropriate times to contain the crisis.
10:08am: Shelby has taken over questioning. He's explaining to Geithner how the Federal Reserve System works, with a board of governors and 12 presidents of the individual Fed banks. Who will be accountable? Shelby asks.
Geithner: "The chairman of the board of the Federal Reseve would be accountable--as he is now."
10:10am: Shelby: The Fed gets systemic risk regulatory powers because you say it has the most expertise. But I don't agree. "As a systemic risk regulator the Fed would likely have to regulate insurance companies, hedge funds, asset companies, mutual funds and a variety of other firms it has never regulated before." Why couldn't there just be a newly created entity?
Geithner: No, it wouldn't be that sweeping. The Fed would exercise systemic risk authority over the major banks and investment banks in the country. "We do not envision quite as sweeping and broad a net as you suggested in your initial remarks."
10:13am: Sen. Charles Schumer, D-N.Y. has begun his questioning. He's expressing love for the proposal and says Geithner deserves "a pat on the back" for coming up with the consumer protection agency and also the concept that lenders and securitizers must hold on to part of the risk for the products they create.
10:14am: Schumer: We have to establish a regulator with a bird's eye view of the system if we don't want this crisis to happen again. "We cannot let the perfect be the enemy of the good here."
Schumer: "I tend to agree that the Fed is the best" candidate for systemic risk. "A council, everyone would pass the buck and it would stop nowhere." A new regulator wouldn't have the institutional knowledge to assume responsibility for systemic risk. "Until shown a better example, I think the Fed, at least tentatively, is the best one."
10:16am: Schumer points out that with the new consumer protection agency there will still be four different regulators overseeing banks. "Why didn't you consolidate the banking regulators more?" Why should the Fed regulate state-chartered banks?
Geithner: We thought a lot about that. "We wanted to make sure we were focusing on those problems that were central causes of this crisis."
10:18am: "The basic problem that we faced was in the thrift charter," Geithner is saying. Bells are tolling for the Office of Thrift Supervision.
10:20am: Sen. Bob Bennett, R-Utah, is protesting the cancellation of the industrial loan corporation charter. ILCs "have been stronger than the banks," Bennett says. How is this addressing the core problems that caused the financial crisis?
Geithner: "This is a very complicated issue and it is hard to be sure what the right path is here...Institutions that do things like take deposits and make loans...need to come within a common framework of standards and oversight."
10:23am: "The theory is fine," Bennett replies, "but in practice this is an area that works." Why would the President want to take away this source of credit?
Bennett: "You're engaged in overkill here in my opinion."
10:24am: Bennett has cast the issue as a power struggle between the Fed and the Federal Deposit Insurance Corp. over authority over the ILCs.
10:25am: Sen. Daniel Akaka, D-Hawaii has asked Geithner to explain how the consumer protection agency will work. Geithner responds: It will get rule-writing and enforcement authority. Consumer advocates' advice would guide the creation of new rules. One option being considered it the creation of a new, standardized mortgage product.
10:30am: Geithner says financial education is important and should begin early and should be taught in schools.
10:33am: Geithner is defending the decision to put off dealing with Fannie Mae and Freddie Mac in this round of regulatory restructuring. He says the government-sponsored enterprises did contribute to the financial crisis but they aren't germane to establishing a new system to protect the financial markets against systemic risk.
10:38am: Now, Geithner's emphasizing the importance of preserving independence for the Fed. He says that does not preclude giving the Fed two different sets of responsibilities. "To change the way 13(3) now acts, to require the approval of the Secretary of the Treasury, is an important change" because it will help mitigate some of the Fed's power without significantly impacting the Fed's independence. Limiting 13(3) (the Fed's power to lend in emergencies) will also help prevent moral hazard.
10:41am: Sen. Mark Warner, D-Va., is asking Geithner what will happen with the Tarp warrants. As for reg restructuring, "I think we realize," he adds, "that if we mess this up the unintended consequences to not only our own economic recovery but the financial stability of the whole world is at stake."
Warner: "Systemic risk ought to be put in a council that would include the Fed...with an independent chair and a staff that would be solely focused on systemic risk."
Warner: The council, as it is structured in the current proposal, "is emasculated."
10:44am: Warner is asking how the governemnt would fund a resolution authority for a company as large as Citigroup. He also wants to know whether banks would end up having to pay for the resolution of non-banks.
Geithner: We want to adapt the existing resolution model of resolving banks to the resolution of bank holding companies. For funding, we want to have an assessment after the fact, "over time," applied to bank holding companies only in the event of a loss.
10:47am: Warner: So the public would have to act as "a short-term bridge" to fund the resolution of a large bank holding company? Why couldn't the cost be a contingent liability on the books of bank holding companies?
Geithner: We definitely thought about that idea but it didn't seem practical, in the end.
10:48am: Sen. Jim Bunning, R-Ky., has begun his questioning. Geithner is again explaining why the Fed is the best candidate for systemic risk regulator.
Bunning: But the Fed took 14 years to write one particular consumer protection regulation after Congress authorized it to do so, so what makes you think the Fed would act fast now?
Geithner: We're taking away consumer protection authority from the Fed. Its powers to recognize systemic risk, however, remain unmatched. They are, of course imperfect. But we have to have "much stronger cushions in the system, shock absorbers" like capital and liquidity requirements. "That is the only real effective defense." The critical failure of policy was not to establish more conservative constraints on leverage in good times.
10:52am: If you want the reforms to be bi-partisan, why did Democrats get briefed on the plan first, before Republicans?
Geithner: I invited members of both sides of the aisle to a briefing.
10:53am: Bunning: "You think Treasury should have a slush fund of $700 billion under their control, which is what Tarp is." Why can't Tarp be declared to be over?
Geithner: We still aren't out of the woods.
10:54am: Sen. John Tester, D-Mont., is asking why now is a bad time to start over from scratch with financial regulation.
Geithner responds that "much more substantial changes" are not necessary and wouldn't address the system's core vulnerabilities.
Tester: But there will still be gaps and overlaps in this proposal, won't there? What about combining the SEC and the CFTC?
Geithner: "The Congress has considered many times in the past merging those two entities." But we're more focused on bringing the underlying statutes governing derivatives markets "more into conformity."
10:57am: Tester: How will this plan bolster consumer confidence?
Geithner: Through clearer accountability and stronger authority in terms of market integrity, investor protection, consumer protection, bank supervision and systemic risk monitoring. "Those are the core responsibilities of policy in any financial system."
10:59am: Geithner admits, "we are not proposing an elegant, neat structure." Look at other countries who have done that--there's no evidence that neatness and consolidation has worked better.
BankThink's observation: Geithner has referred several times this morning to comparisons between the US regulatory structure and that of other countries. It's interesting for the level of curiosity it displays about the workings of bureaucracies outside of the States. We're used to navel-gazing, and this is refreshing.
11:03am: Mike Johanns, R-Neb., opens his questions with a warning that the economic and market revivial that seems to be manifesting itself this quarter could be a mere "dead cat bounce." He moves on to question, again, the idea of making the Fed systemic risk regulator. How could systemic risk even be observed and monitored?
Geithner: First of all, you're right to be concerned about the economy. On the Fed, preserving independence is key and we wouldn't recommend anything that would put that independence at risk or damage the Fed's credibility.
11:08am: Sen. Bob Menendez, D-N.J.: "If we have institutions that are too big to fail, have we not failed already?"
Menendez: Do increased capital requirements really do the trick of avoiding creating a too-big-to-fail institution?
Geithner: We need to make sure the system can withstand the failure of a large institution. That will involve setting tougher limits on risk-taking and higher capital standards and other cushions. We also need a better resolution system in the event of the failure of a big institution. Those powers combined will help us maintain stability in the financial system.
11:11am Menendez: And how would the systemic risk council you proposed actually exercise any power? What if it disagrees with the Fed? How will it initiate corrective action?
Geithner: "We're giving the council the power to collect information" and recommend changes but not to implement them. "That would create the risk of more confusion and less accountability." A committee can't take on the responisibility to force big firms to change. That would allow for too much diffusion of responsibility.
Menendez: But the Fed dropped the ball on regulating mortgage lending. How are we to trust its judgment?
Geithner: It will have to be more accountable to Congress. And I can't tell you that it will be able to prevent every single problem in the future. But it will be better than today.
11:14am: Sen. Mel Martinze, R-Fla., has returned the discussion to the GSEs. They contributed to the mortgage crisis. Why are we creating more entities that are too big to fail by extending an implicit government guarantee to big banks?
Geithner: First of all, Congress tried to fix the GSEs last year--that's a beginning. And we're proposing stronger, more conservative capital requirements for the banks so they won't end up like the GSEs.
11:18am: Martinez: And when will the consultation on reforming the GSEs conclude and who will end up recommending a solution to the government's temporary conservatorship of the GSEs?
Geithner: We haven't designed a plan for that yet, but the Federal Housing Finance Agency and the Department of Housing and Urban Development will definitely be involved.
11:20am: Sen. Michael Bennet, D-Colo.: It's obvious that people can't yet agree on how to change financial regulation for the better. But one thing is clear: Our deficit has soard and our savings rate has plummeted. "If we could rewind the movie that we just had play out..." if we had had this proposed regime in place earlier?
Geithner: The government would have been able to act sooner and we also would not have faced such tremendously levered institutions.
Geithner: The Treasury Secretary will also now be required give regular reports to Congress on the monitoring of systemic risk and the overall effectiveness of the regulatory system.
11:25am: An interesting Freudian slip: Sen. Bob Corker, R-Tenn., opened his questions by addressing "Mr. Chairman" and the committee members and thanking everyone for "being here." He was referring to Dodd, but Geithner misunderstood.
Geithner interjected: "I'm not Mr. Chairman yet."
11:26am: Corker goes on with the question of whether it would be expected that someone from the White House would be appointed Fed chairman. "I would like to make sure that the people who were involved in giving all of these new powers to the Fed" aren't taking advantage of it, Corker added.
"No I don't think that would be appropriate," Geithner replied rather sheepishly.
11:28am: Corker: Why are you reserving the power to do what's allowed in Tarp?
Geithner: Tarp is temporary. We are not trying to preserve that power. It doesn't have to do with giving the FDIC resolution authority.
11:32am: Geithner is talking about the necessity of tightening the Fed's authority and responsibility for setting capital requirements and regulating bank holding companies.
11:33am: Sen. Jack Reed, D-R.I.: The Fed is supposed to report, by October, on the changes the Fed will have to make to accomodate its new responsibilities. What are we supposed to do in the meantime?
Geithner: You don't have to wait for the Fed in terms of the legislative process. We just want the Fed to do that report to explore how to impose good safeguards on the separation of powers within the Fed.
Reed: I think there definitely needs to be some reorganization at the Fed, and also a change in the culture there. Can safety and soundness still trump everything else? Also, we need more transparency at the Fed. Before the financial crisis began, there were debates inside the Fed about whether there was a housing bubble. But we didn't know about it. How will there be more communication in the future? And who will provide oversight of the Fed's duties? The Fed's foot-dragging on the housing-related regulations it had to write wasn't mitigated by the letters I wrote.
11:39am: Sen. Kay Bailey Hutchison, R-Texas, says she's warming to the idea of giving the Fed more power, but she's still a little unsure. "I think that your proposal is attempting to do something that is good...Trying to level the playing field between banks and savings and loans is good." But do thrifts really have to disappear entireley?
Also, "I agree with Sen. Schumer" that mortgage originators need to hang on to some of the risk of the loans the originate.
11:41am: Hutchison: But on Tarp, we feel we were misled on the Tarp program's original intentions. You've continued to use Tarp in different ways from the one we anticipated. And now you want to extend the program. "Do you believe that these eleven funds that have been a part of Tarp that were not all a part of the original purpose of Tarp should have more Congressional oversight?"
Geithner: "We said that there were five areas where we thought it was going to be appropriate to use Tarp:" They were housing, securitization, small business lending, secondary markets, and bank recapitalization. We started programs in all of those areas. "These programs are subjected to an enormous amount of oversight...We have been fully transparent about the specific terms underpinning each of these programs."
Hutchison: Is that a no?
Geithner: The current oversight mechanisms have done a good job.
11:45am: Sen. Jeff Merkley, D-Ore., is asking about the consumer protection agency: "Would they have the power, without additional authority from another sector, to do things such as shut down new tricks and traps introduced into credit card practices" or mortgage lending practices?
Geithner: Yes.
11:47am: Merkley: I'm reluctant to have the Fed set capital adequacy rules. They were the ones who fought against leverage ratios.
Geithner: But if you give it to too many people you don't have accountability.
Merkley, undaunted: In the past, we gave the Fed powers it didn't exercise. Is there a way for the Fed to see these new powers as a major mission in addition to monetary policy "so they won't fall asleep at the switch?"
Geithner: But look at mortgages and other areas in which there was a lot of risk--the dangerous behavior increased along with the distance from a Fed-regulated instutition. The Fed didn't supervise firms where the problems were most acute.
11:50am: Sen. Mike Crapo, R-Idaho, is protesting "the bifurcation of consumer protection and safety and soundness regulation." Shouldn't those things still be connected?
11:53am: Geithner says the model of using safety and soundness to control abuse of consumers hasn't worked well enough. "We've had a good experiment in whether that model works and it didn't work well enough," he says. "The rules themselves were I think almost certainly not sufficiently strong," nor was the enforcement of them.
11:54am: Crapo: Also, how is this proposal serving to streamline our financial regulation? Won't adding more regulators it make us less internationally competitive?
Geithner: We're not adding a regulator. The creation of the consumer protection agency is balanced by the elimination of the OTS. Also we will lead the world in basic protections for stability.
11:56am: Sen. Evan Bayh, D-Ind., begins by commending Geithner on his dedication to bipartisanship. Then he asks whether the regulatory restructuring plan will adequately prevent future crises since it doesn't really address the imbalance of savings and consumption "in the world." The size of the deficit is going to be larger than GDP growth. Will macro factors overwhelm this reg restructuring effort?
Geithner: We have to make sure that our macro conditions don't overwhelm our efforts. But savings is increasing, and you're right that we do have to bring the deficit down. Still, "there is a recognition, not just in China but in countries around the world, that the US consumer is not going to lead the world out of this recession."
12:00pm: Bayh: Also, how are we going to avoid global regulatory arbitrage?
Geithner: We need a level playing field and higher standards globally. We are trying to work "in parallel from the beginning" with other countries. "There is a very elaborate system of cooperation in place" under the Financial Stability Board to drive these reforms.
12:04pm: Geithner, in response to a question from Sen. Herb Kohl, D-Wisc., about the FDIC's effectiveness as a resolution authority, referred to Chairman Sheila Bair as "Commissioner Bair." He must be overwhelmed.
12:05pm: Sen. Tim Johnson, D-S.D., asks why there isn't a better proposal for insurance regulation.
Geithner replies that the regulatory restructuring process will move in stages.
Johnson: Should reinsurance have a federal charter?
Geithner: We don't have a view on that yet.
12:07pm: Hearing adjourned. Stay tuned for this afternoon's House Financial Services hearing, at which Geithner will also testify.
Update: Due to floor votes, the House hearing has been postponed to a later, unspecified date.
