Bloomberg / Business Week
U.S. Treasury Secretary Timothy F. Geithner rejected calls to separate banks from risk-taking activities, saying it couldn’t prevent future financial crises.
“To create stability, some argue, we should just separate banks from ‘risk,’” Geithner told the Financial Crisis Inquiry Commission in Washington today. “But, in important ways, that is exactly what caused this crisis.”
Legislation proposed by U.S. Senator Blanche Lincoln, an Arkansas Democrat who leads the Senate Agriculture Committee, would force banks to wall off some of their derivatives-trading desks. Lincoln’s measure would require Goldman Sachs Group Inc., JPMorgan Chase & Co. and rival banks to push their swaps desks to subsidiaries.
“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 said.
The Treasury secretary and his predecessor, Henry Paulson, testified to the panel investigating the causes of the financial crisis as Congress debates the most sweeping overhaul of banking regulations since the Great Depression. U.S. policy makers and lawmakers are concluding that capital requirements didn’t adequately cover risks that built up in the system and that the threat to the economy if house prices started to decline in value was underestimated.
Not Powerless
“Absolutely, we could’ve done more,” Geithner said. “I do not believe we were powerless.”
If the government 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,” Geithner said.
Geithner, 48, reiterated his support for the financial overhaul, saying proposed legislation would “require the enforcement of more conservative capital and leverage requirements on the activities, whether on- or off-balance- sheet, of all major financial institutions.”
A firm such as American International Group Inc. or Lehman Brothers Holdings Inc. “will not be able to escape consolidated supervision by virtue of its corporate form,” said Geithner, who was president of the Federal Reserve Bank of New York from 2003 to 2009. Financial rule changes also “will bring comprehensive oversight and transparency” to over-the-counter derivatives markets, he said.
Market Discipline
Geithner called the financial turmoil “a pure failure of market discipline.” More oversight is needed because “the history of this crisis is full of examples where regulators did not use the authority they had early enough or strongly enough to contain risks in the system,” he said. Paulson, 64, said the mistakes he made were communications failures that contributed to government bailouts that were subjected to widespread public criticism.
He also said credit-rating companies were “a dangerous crutch” that too many investors and banks depended on leading up to the crisis.
Companies such as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings “should give their advice just like equity research houses do, and I think investors should look at those as one tool,” said Paulson, who was Treasury chief from 2006 to 2009. “I don’t want the ratings agencies to be held up as the font of all truth and have the ratings be part of our securities laws.”
Shadow Banking
The inquiry commission was holding hearings on the so- called shadow banking system, financial activities that don’t fall under traditional banking regulations.
Former Bear Stearns Cos. chief executive officers James “Jimmy” Cayne and Alan Schwartz, and former Securities and Exchange Commission Chairman Christopher Cox testified yesterday about the firm’s collapse.
Paulson said bets against Bear Stearns’s survival before the firm’s sale to JPMorgan Chase & Co. amounted to “the wolf pack trying to pull down the weak deer.”
“I don’t use the word collusive because it’s got a legal connotation,” said Paulson, a former Goldman Sachs chairman. “It sure looked to me like some kind of coordinated action,” even if “I’m not saying there was behavior that was illegal.”
Short Sellers
Short-selling “is essential for the price-discovery process,” Paulson said.
The financial legislation being debated in Congress broke through a logjam in the Senate yesterday.
Lawmakers voted for an amendment offered by Senators Christopher Dodd, a Connecticut Democrat, and Richard Shelby, an Alabama Republican, to drop a $50 billion industry-supported fund to cover the cost of unwinding a failing firm, and ensure that shareholders and unsecured creditors bear losses when the government liquidates a business.
The Senate also approved an amendment offered by Senator Barbara Boxer, a California Democrat, to bar use of taxpayer funds to rescue failing financial companies.
“To create stability, some argue, we should just separate banks from ‘risk,’” Geithner told the Financial Crisis Inquiry Commission in Washington today. “But, in important ways, that is exactly what caused this crisis.”
Legislation proposed by U.S. Senator Blanche Lincoln, an Arkansas Democrat who leads the Senate Agriculture Committee, would force banks to wall off some of their derivatives-trading desks. Lincoln’s measure would require Goldman Sachs Group Inc., JPMorgan Chase & Co. and rival banks to push their swaps desks to subsidiaries.
“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 said.
The Treasury secretary and his predecessor, Henry Paulson, testified to the panel investigating the causes of the financial crisis as Congress debates the most sweeping overhaul of banking regulations since the Great Depression. U.S. policy makers and lawmakers are concluding that capital requirements didn’t adequately cover risks that built up in the system and that the threat to the economy if house prices started to decline in value was underestimated.
Not Powerless
“Absolutely, we could’ve done more,” Geithner said. “I do not believe we were powerless.”
If the government 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,” Geithner said.
Geithner, 48, reiterated his support for the financial overhaul, saying proposed legislation would “require the enforcement of more conservative capital and leverage requirements on the activities, whether on- or off-balance- sheet, of all major financial institutions.”
A firm such as American International Group Inc. or Lehman Brothers Holdings Inc. “will not be able to escape consolidated supervision by virtue of its corporate form,” said Geithner, who was president of the Federal Reserve Bank of New York from 2003 to 2009. Financial rule changes also “will bring comprehensive oversight and transparency” to over-the-counter derivatives markets, he said.
Market Discipline
Geithner called the financial turmoil “a pure failure of market discipline.” More oversight is needed because “the history of this crisis is full of examples where regulators did not use the authority they had early enough or strongly enough to contain risks in the system,” he said. Paulson, 64, said the mistakes he made were communications failures that contributed to government bailouts that were subjected to widespread public criticism.
He also said credit-rating companies were “a dangerous crutch” that too many investors and banks depended on leading up to the crisis.
Companies such as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings “should give their advice just like equity research houses do, and I think investors should look at those as one tool,” said Paulson, who was Treasury chief from 2006 to 2009. “I don’t want the ratings agencies to be held up as the font of all truth and have the ratings be part of our securities laws.”
Shadow Banking
The inquiry commission was holding hearings on the so- called shadow banking system, financial activities that don’t fall under traditional banking regulations.
Former Bear Stearns Cos. chief executive officers James “Jimmy” Cayne and Alan Schwartz, and former Securities and Exchange Commission Chairman Christopher Cox testified yesterday about the firm’s collapse.
Paulson said bets against Bear Stearns’s survival before the firm’s sale to JPMorgan Chase & Co. amounted to “the wolf pack trying to pull down the weak deer.”
“I don’t use the word collusive because it’s got a legal connotation,” said Paulson, a former Goldman Sachs chairman. “It sure looked to me like some kind of coordinated action,” even if “I’m not saying there was behavior that was illegal.”
Short Sellers
Short-selling “is essential for the price-discovery process,” Paulson said.
The financial legislation being debated in Congress broke through a logjam in the Senate yesterday.
Lawmakers voted for an amendment offered by Senators Christopher Dodd, a Connecticut Democrat, and Richard Shelby, an Alabama Republican, to drop a $50 billion industry-supported fund to cover the cost of unwinding a failing firm, and ensure that shareholders and unsecured creditors bear losses when the government liquidates a business.
The Senate also approved an amendment offered by Senator Barbara Boxer, a California Democrat, to bar use of taxpayer funds to rescue failing financial companies.
