Treasury Secretary Timothy Geithner is appearing once again before the House Financial Services Committee to defend the Obama administration's proposals to reform the financial system. Feeling unnerved by a strong sense of deja vu? That's because this hearing already happened once--on July 24. The committee's chairman, Rep. Barney Frank, D-Mass., announced halfway through it that the committee had to break for votes in the House, and that the hearing would be rescheduled. Since then, Frank has offered his own perspectives on derivatives regulation and has had to deal with news from the Senate that Chris Dodd, D-Conn., the chairman of the Senate Banking Committee, is in favor of a complete consolidation of the bank regulators. Stay tuned for live updates; the hearing is set to commence at 9:30am.

9:36am: Frank opens by insisting that "the media reports" that regulatory restructuring "is dead for the year are inaccurate." He then announces that legislative hearings on the various reg restructuring proposals will begin next week. "It is my expectation that the legislation we've been talking about...We will be voting on this" in November. He also credits former Treasury Secretary Henry Paulson with presenting the first kernels of the current plan in April 2008, when he presented his "blueprint." Considering how thoroughly it was shot down at the time, that is interesting.

9:39am: Frank, on a resolution authority for systemically important institutions: "There will be death panels enacted by this Congress, but they will be for non-bank financial institutions...we are talking about dissolutions, not resolutions. We are talking about making it unpleasant for the entities." 

9:41am: Frank says making a list of systemically important institutions would be "a mistake." He says "we are going to empower the regulators to take action to stop this from happening but there will not be a pre-ordained list." Instead, similar to a convention in the legal debate over pornography, systemic importance will be determined by a "know-it-when-you-see-it" characteristic.

9:43am: Rep. Spencer Bachus, R-Ala., points out that the administration's proposal has failed to garner consensus on the Hill or among regulators. "What we do not need, and what we've had too often, is government policies which encourage harmful business practices...or, when they went terribly wrong, bless them with bailouts." He says he agrees with the idea of a systemic resolution system to "liquidate" large, faltering financials.

 9:46am: Bachus conjures healthcare and energy reform in his objections to the reg restructuring plan, complaining of the "massive new government bureaucracy" it would establish.

9:47am: Now Bachus is laying out the Republican alternative to the administration's plan: Consolidating the bank regulators, using "an enhanced bankruptcy process" to deal with failing financial giants. 

9:49am: Rep. Jeb Hensarling R-Tx., has come out with guns blazing: He's attacking the proposed consumer financial products agency as a government organ that would bear down on "car dealerships...and neighborhood department stores." Sounds like the U.S. Chamber of Commerce ads have had a powerful effect.

9:52am: Rep. Luis Gutierrez, D-Ill. uses his opening statement to criticize the Federal Reserve's inaction on consumer protection laws and to argue in favor of the CFPA.

9:54am: Rep. Scott Garrett, R-N.J. is focusing on the delays in the Obama administration's timeline for reg restructuring. The delays have made it hard for Congress to come up with its own legislation. Now, Garrett points out, Dodd wants consolidation and that throws a new "wrench" into the effort. Garrett's being surprisingly subtle today compared with his usual partisan screeds.

9:59am: Geithner has begun his testimony. He says the proposal won't stifle innovation or limit competition. He also insists it will represent a consolidation of regulation. And it will save community banks and credit unions.

Geithner on moral hazard: "We can't have a system in which taxpayers are called upon to absorb financial failure." He seems to have a frog in his throat this morning. He is arguing for the "tools and authority to unwind" failing financials and impose higher capital requirements--especially for the biggest firms. "This package of measures is central to reform," he says, the measures can't be adopted piecemeal.

10:02am: Bachus has begun questioning, since Frank ducked out of the hearing. Bachus raises the issue of Frank's own intentions to change details about the CFPA, including eliminating the "plain vanilla" requirement, which would limit the products banks could offer consumers to only the most straightfoward products.

Geithner: The administration is "very supportive of most of those changes." But the plain vanilla requirements at least need to be substituted with changes to disclosure rules that make loan terms more understandable.

10:05am: Bachus asks Geithner whether the designation of systemic importance would give an institution a competitive advantage. Geithner replies that the designation would "make it clear" that being systemically important comes with more stringent requirements. This would only work, however, if systemic resolution authority came along with it, he adds.

Bachus wants Geithner to promise there won't be any more bailouts, but Geithner says that would be like tearing down fire stations to prevent fires.

10:08am: Rep. Maxine Waters, D-Calif. has the floor now. She's bringing up Treasury's workforce diversity numbers. She wants a more specific breakdown of each Treasury division and wants know know what types of jobs each group of minorities holds. She moves on: Credit default swaps are in her sights now. She's defining them to Geithner and talking about the dangers of naked CDS. Why doesn't the administration's proposal give the Securities and Exchange Commission the authority to ban naked CDS?

Geithner: We propose to give the SEC and the Commodity Futures Trading Commission the authority to prevent manipulation of the derivatives markets, but we don't think banning naked CDS is necessary. Still, the authority over market manipulation "should be a centerpiece" of the committee's derivatives regulation.

Waters: Moving on, about the CFPA, are you trying to come up with a better way to make the Fed and the Federal Deposit Insurance Corp. more comfortable with the CFPA and their roles in it?

Geithner: The regulators are trying to protect their jobs. "But let me say it starkly: Did that system work?" You can't expect them not to try to save their consumer compliance departments' jobs but you don't have to go along with that.

Waters: The administration needs to "get its act together."

Geithner: Congress has to "figure out what's right for the country," i.e. choose whether it wants to support those regulators or not.

Waters: On plain vanilla, how important is that to the overall CFPA proposal? (nice question)

Geithner: We don't want to cut off access to credit, so we have been open to suggestions that "you find a way to have stronger standards without creating the risk that over time" bureaucrats will restrict credit choices...I like Frank's proposal.

10:15am: Hensarling is on "death panels" now. He wants to know if that's what Geithner would really call the resolution authority. Geithner says that is not how he would describe it--"we're proposing to take a regime that was set up for banks and thrifts...to make sure the government has the ability to come in and help restructure" failing institutions. "So that the taxpayer is less exposed to risk in that context."

Hensarling: Ok moving on. I'm confused about something else now: "Are mandatory standardized products on the table or off the table?"

Geithner: It was part of our original proposal but "we are very committed to" protecting consumers without limiting choice. "There are several ways to do that."

Hensarling: So there are other proposals? Geithner: "Yeah, absolutely."

Hensarling: Wouldn't the CFPA regulate "Wal-Mart, Target and Macy's?"

Geithner: "If you are in the business of providing financial credit and you are competing with banks and thrifts then there should be a common set of principles" governing that.

Hensarling: But what about Wal-Mart, Target and Macy's?

Geithner: Dude, it's up to you--you make the rules!

Hensarling: Starbucks, Chili's, Applebees, rental car companies....

Geithner: I get what you're doing. But we need a common set of rules.

10:20am: Gutierrez calls time on this duet and takes over questioning.

Gutierrez: Too much leverage is bad, right? And it's the SEC's fault.

Geithner: I agree that too much leverage is bad.

Gutierrez: Let's "make sure that never happens again." Also, Paulson, the former Treasury Secretary, used to work for a Wall Street firm. How do we make sure that investment bankers and former Wall Street executives who move over to the regulatory side don't convince regulators to allow this high leverage ratio again?

Geithner: Institutions have to be made to bear the consequences of their own mistakes.

Gutierrez: But once this bill is passed...wait, also I can see the partisan trick the Republicans are playing, suggesting that you and Frank "don't agree on the vanilla envelope..." He tries again. "I mean the plain vanilla envelope..." But anyway how will we make sure this whole thing doesn't happen again?

Also, why is nobody going to jail over the current crisis?

"I believe in cops on the beat...I think we need to put some cops on the beat on Wall Street."

10:26am: Gutierrez finishes his rant and passes the mic to Garrett.

Geithner is telling Garrett that financial regulatory reform needs to happen before the memories of the crisis recede too far.

Garrett asks about Bank of America: Does Geithner remember telling BofA what it should or shouldn't disclose to its shareholders during the acquisition of Merrill Lynch?

Geithner: I recused myself from engagement with that issue because I had already been nominated to Treasury Secretary by Obama.

10:30am: Garrett wants to know whether Paulson or Fed Chairman Ben Bernanke told Geithner about the issues surrounding disclosures. They parry. Garrett wants a yes or no and Geithner seems willing to say anything except an actual "no."

10:31am: Rep. Carolyn Maloney, D-N.Y., has taken over questioning. Thanks for your leadership on credit card reform, she tells Geithner. I have some questions about the "too big to fail" designation. If we identify systemically important institutions, aren't we saying they're too big to fail? Won't they be incented to take more risks? "It still is a huge taxpayer guarantee." And "aren't there some activities that are so risky and do not have any public benefit that they should not be part of an institution that has a government guarantee?" Like proprietary trading. Why should people be able to make a profit and then get a bailout? Former Treasury Secretary Paul Volcker thinks having an insurance fund for other financial institutions would be good, but he doesn't support giving it to the CDS market.

Geithner: Nothing in our proposal would provide the kind of guarantee you're talking about.

Maloney: But if those businesses are part of a bank they could bring it down. They should be seperate.

Geithner: That's a separate question.

Maloney: Moving on, how's the toxic asset issue going?

Geithner: The markets for some mortgage-related securities have revived, but we're just "on the verge now" if giving funds to the fund managers so they can start buying toxic assets under the Public-Private Investment Partnership.

10:37am: Rep. Randy Neugebauer, R-Tx., has begun his questioning. He wants to know why all of the regulators disagree with Geithner on consumer protection. You say it's because they're trying to protect their turf...but "I think you made it a little clearer in your meeting with them" (he's talking about the infamous, invective-filled corralling of the regulators before a Senate Banking hearing that got leaked to the press over the summer)...But maybe that's not the real reason. Maybe that's going to upend their operations at the wrong time.

Geithner: First of all, "I have great respect" for "all of those people" but if I were in their shoes I'd be saying the same thing. "They're defending a set" of traditions they've held for a long time. But it hasn't worked.

Neugebauer: On derivatives, how are you going to make sure end users using derivatives contracts to hedge their business risk can still do that?

Geithner: We know that companies have to hedge using derivatives and that their contracts can't all be standardized. But we can't create a big loophole.

10:42am: The crisp sound of the gavel means Frank is back and sticking to the clock. He calls on Rep. Gary Ackerman, D-N.Y., who starts in on credit rating agencies. A triple-A rating was like a Kosher certification, he points out. What is the administration going to do about that?

Geithner: Yes credit rating agencies were a big part of the failures of the products they endorsed. We have to reduce the risk of conflicts of interest so the ratings can be more accurate in the future.

10:45am: Ackerman: On SIPC: It's been nine months since "Bernie Madoff discovered he was a crook and turned himself in." His victims are still trying to claim their money, and SIPC contracted out the processing of those claims. Most people haven't gotten paid yet. How are investors supposed to have confidence in what's going on if SIPC can't process the claims faster?

Geithner: "You're right; it's tragic and unfair." We can talk to you individually.

Ackerman: There's got to be a plan to speed this up. We made "Cash for Clunkers" work really fast. We can't do this?

10:47am: Frank adds that he wants to look at the degree of protection people get under SIPC as a wider issue of investor protection next year.

Then he calls on Rep. Michael Castle, R-Del., who asks Geithner more about what he thought about Frank's memo.

"The broad thrust of those proposals looked very promising and encouraging to us," Geithner says.

Castle: I'm worried about "mission creep" in the CFPA. Credit cards. Student loans. "There are many things that financial institutions, particularly banks, do that have not been questioned." Like commercial lending. "If we get a very activist agency" that agency could cause problems for normal banking operations. Also, I think most consumers are happy with their banks.

Geithner: We definitely need to clearly define the CFPA's authority and we've recommended having a board of other regulators to keep them in check. But in the past "we underdid" regulation. And that put the healthy bank operations at risk.

10:52am: Castle adds that he's unhappy with how Tarp was executed and how toxic assets remain on banks' balance sheets.

10:53am: Rep. Brad Sherman, D-Calif., has the floor now. He points to Sec. 1204 of the bill and calls it "Tarp, on steroids." Sec. 1204 is unlimited, though, whereas Tarp was only $700 billion and it had an expiration date. "In Tarp, there are all kinds of special oversights, including Elizabeth Warren, and in your proposal there's no oversight." There are also no limits on executive compensation.

Forgive us at BankThink, we didn't know off the top of our head what Sec. 1204 of the Treasury's bill said, but apparently it is the resolution authority.

Geithner: "I don't recognize most of your concerns in the approach we've recommended," but I agree that "it would be a mistake for us as a country, as part of the reform process," to institutionalize "too big to fail."

Sherman interrupts him. He wants to limit Sec. 1204 "to $1 trillion." Still not sure what he means. Geithner doesn't reveal whether he understands. "I would not support proposals that would put this country in the position we were in in 2007 and 2008..." where we didn't have the authority to resolve failing institutions.

The argument seems to be over the potential cost of a resolution. Sherman says "the only companies that are going to benefit from this are the systemically important institutions."

10:58am: Frank calls time. Geithner quickly interjects that he does not agree with Sherman's characterization of the resolution authority.

Now Rep. Frank Lucas, R-Okla., brings up community banks' fears of the CFPA and its potential regulatory burden. He quickly moves on to derivatives--he's the ranking member of the House Agriculture Committee--and wants to know again how the Treasury's derivatives legislation would keep end users, small companies using derivatives to hedge, safe from crippling capital and margin requirements.

11:02am: Geithner says he likes Frank's proposed solution to the cost issue for community banks in the establishment of the CFPA. On derivatives, he says, he definitely wants end users to be able to keep hedging. He's willing to work with House Ag and the SEC and the CFTC to keep trying to fine-tune the exemption.

11:05am: Rep. Melvin Watt, D-N.C., says he's studying the practicality of the CFPA proposal. "We gave the Fed and the FDIC and the other regulators substantial consumer protection authority...but we also gave them an expectation, a mandate, to assure the safety and soundness of financial institutions. My question to you is you've been in one of these agencies--you came out of one of these agencies--if I look at you and tell you that your obligation is to assure the safety and soundness of those institutions that you have the responsibility to regulate" and I also give you consumer protection authority, "which one of those things are you going to do come crunch time?"

Geithner: You would focus less on the consumer side.

Watt: So safety and soundness is "far and away" a higher priority for the bank regulators?

Geithner: "That's the risk."

Watt: You're being too kind. The Fed has even admitted in testimony before my subcommittee that they didn't see consumer protection as a high priority.

Geithner: "A large part of it was the fact that there were all these other institutions that were allowed to compete with banks in offering credit" without any supervision.

 11:10am: Rep. Donald Manzullo, R-Ill., wants to know if the cause of the crisis was really subprime mortgages that weren't regulated properly.

Geithner: No.

Manzullo: "A lot of people believe that if the Fed had done its statutory role, which is to govern instruments and underwriting standards with regards to these mortgages" that subprime mortgages wouldn't have developed and multiplied, and the underlying products bundled in CDOs and mortgage-backed securities would have been sound.

Geithner: There was a lot of activity that was totally outside the scope of federal regulators. The crisis would have been smaller if the authority that was there had been used more effectively earlier, but it still would have been a crisis.

They argue over the specifics of this. Frank has to step in and clarify that Manzullo is complaining about the systemic risk resolution authority and Geithner thinks he's complaining about the CFPA.

Manzullo, moving on, is now indeed talking about the CFPA. He thinks that it will create "mixed signals" to be sent to the banks. He also doesn't like the exemption list from the application of the CFPA--thinks it's too narrow.

11:16am: Rep. Gregory Meeks, D-N.Y., wants to know whether the administration's plan will cause multinational financial firms to "relocate resources internally" to skirt the toughest regulations. Geithner agrees that it's a problem and says that international coordination is necessary. There has to be a "new international accord on capital," and the outlook is positive for that actually happening, he adds.

11:18am: Meeks now wants to know how a systemic resolution authority would affect international components of companies. He cites the Lehman Brothers bankruptcy proceedings in London as an example.

Geithner: Each country has to change its laws and regulations.

Meeks: Are you talking about it at the G20 meeting in Pittsburgh?

Geithner: Yes.

Meeks: On the role of the IMF: What do you think about how the IMF could "play a greater role?"

Geithner: Well, it would be nearly impossible to giver the IMF more enforcement authority. But we're suggesting to get countries to commit to reforms to produce internal economic changes that the IMF can help affect.

11:22am: Rep. Tom Price, R-Ga., has begun questioning. He says it's not right to conclude that a failure of capitalism caused the crisis.

Geithner: I wouldn't use that phrase.

Price: Well are we here because of a failure of deregulation?

Geithner: "We screwed up regulation...we just screwed up the regulatory system."

Price: Have you read our Republican proposal for reg restructuring? We propose telling the regulators, "y'all have to do your job," and also telling them that they have to figure out who is going to oversee unregulated products and markets.

Geithner: That won't fix things. Also, it's not fair to say that our proposal increases bureaucracy.

Price: On Tarp, you think that we've moved on from this remarkable threat that we had to our nation and that Tarp's timeline was to be temporary...are you planning on ending Tarp at the end of this year?

Geithner: We pulled the system back from the edge of the abyss and we can wind down some of the emergency authorities. But we're only just now seeing economic growth. It's too early for anyone to declare economic victory. It's important that we not declare victory too soon.

11:28am: Rep. Dennis Moore, D-Kan., is firing an onslaught of questions at Geithner based on a proposal by the president of the Kansas City Fed, Thomas Hoenig. Geithner says he hasn't read the proposal. Moore wants to know if Geithner supports a council "of inspectors general" that would meet regularly and discuss risks in the system. Geithner says he's happy to examine it.

11:30am: Rep. Edward Royce, R-Calif., has taken over questioning. He wants to know how closely Geithner worked with other regulators when coming up with the CFPA proposal. He reads a quote from FDIC Chairman Sheila Bair on the problems with separating consumer protection oversight from safety and soundness oversight. Royce says Bair's words seem to express a "common sentiment" among regulators. Can that really be chalked up to a turf issue?

Geithner: "I think that they're right to raise that potential concern and I think I share that concern and we would not be enthusiastic about a proposal for reform that would create that risk." However, the current system, in which those responsiblilities are put together, does not work. We can change things without undermining safety and soundness supervision.

11:35am: Frank: "I'm surprised by the regulators' newfound interest in consumer protection." He says he's been on the Financial Services Committee since 1981 and he doesn't remember any of the bank regulators ever bringing up consumer protection. Then he recites a litany of examples in which regulators chose to set aside consumer protection authority that they were given. "It is turf. They never cared about consumer affairs and I will now ask every one of those regulators to give me a list of their consumer affairs activities."

 Frank: "It's not that they are bad people;" it's just that they care more about safety and soundness. And we're going to make sure that the CFPA doesn't interfere with the regulators' safety and soundness oversight.

Now Frank asks Geithner whether he thinks the administration's regulatory restructuring plan will drive business overseas. Geithner says he will coordinate with other countries' regulators. But what if other countries try to undercut the U.S.? Geithner: We'll get them to agree to a very black and white proposal.

11:40am: Rep. Kenny Marchant, R-Tx., wants to know whether the new regulations would prevent banks and other financial institutions from holding long-term instruments but funding them with short-term funds. "To me, that was the systemic risk." Geithner agrees that "reliance on very short-term funding that can flee in a heartbeat" was part of the problem that caused the crisis. He says capital requirements will take care of that--the capital banks will be required to hold will have to be long-term.

11:45am: Rep. Ruben Hinojosa, D-Tx., is worried about the CFPA's potential effects on community banks. He says Assistant Treasury Secretary Michael Barr told him that all lenders should be overseen by the CFPA. "I disagree," Hinojosa says. Community banks and credit unions should be exempted. "Why should they be punished for actions of others?"

Geithner says that "one of the great things about our country is that we have a system of 9,000 banks" including community banks, who we definitely don't want to punish. We want to protect them. (He doesn't answer this concern any more specifically.)

Hinojosa asks Geithner to support the financial literacy legislation he and Rep. Judy Biggert, R-Ill., want to add to the bill. Geithner says he will take a look at it.

11:50am: Rep. Eric Paulsen, R-Minn., wants Geithner to devise a system for the regulators to calculate risks to the financial system so they can continue to allow for innovation without letting another crisis develop. Geithner says easily enforcable, basic protections can protect against a crisis, but the future is still uncertain. Risk management isn't perfect. Paulsen, moving on, wants to know about "private sector solutions" for toxic asset guarantees. Geitner says he would love private sector solutions. "This only works if you get the private market to come back."

11:55am: Rep. Emanuel Cleaver, D-Mo., points out that foreclosures are still on the rise. Geithner says the administration can't prevent all foreclosures, but "we are making a lot of progress in bringing more stability to the housing market."

11:59am: Last question is about the budget. Does Geithner have an updated estimate? Leonard Lance, R-N.J., wants to know. Geithner says he does not.

Lance: The GAO said last week that if AIG misses its fourth equity dividend payment due on Nov. 1 you have the authority to appoint two directors to its board. Will you? Geithner: We've seen a substantial transformation of that board already. Lance: well I would hope you would still think about doing that.

Lance is asking for Geithner's opinion in the trade tiff the U.S. is engaged in with China over tires. Geithner says the President acted within the law and that the U.S. government is constantly trying to expand its opportunities to engage in trade.

Lance: Any futher comments on the list of systemically important institutions? Geithner: It will evolve over time. The institutions on it will have to observe constraints on leverage.

12:02pm: Rep Joe Baca, D-Calif., raises the potential problem of conflict of interest among derivatives clearing parties.

Geithner: It's important that the SEC and the CFTC have the oversight to make sure those clearing parties are behaving themselves.

12:04pm: Frank adjourns the hearing. Later, a panel of regulators will testify on the same subject.