Geithner lays out new financial rules/Geithner ‘power grab’ could worry creditors

Geithner lays out new financial rules
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2009
Published: March 26 2009 14:36 | Last updated: March 26 2009 14:52
http://www.ft.com/cms/s/0/9d8a6dd2-1a11-11de-9f91-0000779fd2ac.html


Tim Geithner, US Treasury secretary, set out plans for more stringent scrutiny of the financial services sector, capturing hedge funds and derivatives in a new regulatory regime and demanding institutions build up a bigger layer of capital.

Appearing on Thursday before the House financial services committee, Mr Geithner said that “our system failed in basic fundamental ways” and described his reform of regulation as “not modest repairs at the margin, but new rules of the game”.

“This crisis has made clear that certain large, interconnected firms and markets need to be under a more consistent, and more conservative regulatory regime,” said Mr Geithner. “These standards cannot simply address the soundness of individual institutions, but must also ensure the stability of the system itself.”

Hedge funds above an unspecified size would have to register with the Securities and Exchange Commission and provide data on their counter-parties. Over-the-counter derivatives trades would also be subject to more scrutiny and the administration would “force” trades to go through an approved central clearing house.

Extra rules on derivatives trading are an attempt to prevent a repeat of the near-collapse of AIG, the insurance group, whose risky dealing in credit default swaps led to a $173bn bailout with federal money last September.

Mr Geithner said there were also lessons to be learned from the collapse of Lehman Brothers last year, which led indirectly to a run on money market mutual funds, previously viewed as one of the safest parts of the financial services sector. He said the SEC would be directed to tighten its rules over the funds.

These complex instruments were poorly understood by counterparties, and the implication that they could threaten the entire financial system or bring down a company of the size and scope of AIG was not identified by regulators, in part because the CDS markets lacked transparency.

The broad regulatory overhaul will take on an international dimension, a facet likely to please French and German governments ahead of the Group of 20 summit in London on April 2. Many Europeans see financial regulation as a topic preferable to talk of more fiscal stimulus.

“Markets are global and high standards at home need to be complemented by strong international standards enforced more evenly and fairly,” said Mr Geithner. The administration is to propose a crackdown on tax havens and money laundering.

The regulatory overhaul is safer ground for Mr Geithner who has endured sustained criticism during his two-month tenure as Treasury secretary, accused of presenting a lack of detail in plans to fix the banking sector and questioned over his part in drawing up law that allowed AIG, the bailed-out insurer, to pay large retention bonuses to executives.

Spencer Bachus, the leading Republican on the committee, said legislators must “not rush” into new regulation and said there was a lack of detail in the regulatory framework.

Banking stocks took a sudden tumble after the release of Mr Geithner’s testimony . The sector’s confidence was already fragile after the ratings agency Moody’s downgraded Bank of America’s debt. The bank lost 2.2 per cent to $7.53. Other banks also fell, including Citigroup, which dropped 2 per cent to $2.89 and Wells Fargo, falling 1.6 per cent to $16.15.











Geithner ‘power grab’ could worry creditors
By Tom Braithwaite in Washington and Joanna Chung in New York
Copyright The Financial Times Limited 2009
Published: March 25 2009 20:35 | Last updated: March 25 2009 20:35
http://www.ft.com/cms/s/0/a6c2516c-197b-11de-9d34-0000779fd2ac.html


Tim Geithner’s bid for new power to force a restructuring at failing financial institutions is securing broad approval in Congress, but may prove worrying to creditors.

The Treasury secretary, who returns to Capitol Hill on Thursday to set out his vision for regulatory overhaul in the US, released more details on Wednesday on a plan for a legal framework to put a “non-bank” into receivership at the behest of the government.

With the backing of Ben Bernanke, Federal Reserve chairman, Mr Geithner wants powers to “resolve’’ ailing companies that are deemed systemically important.

He told legislators on Tuesday that such powers would have allowed the government to handle better the collapse of AIG, the giant insurer now surviving on $173bn of taxpayer funds.

“It doesn’t really matter if it’s called a bank, a hedge fund or a purple panda,” says Randy Quarles, a managing director at Carlyle Group, the private equity firm, and former Treasury undersecretary.

“I think it is important for regulators to have the ability to step in in advance of a run actually happening at a systemically important institution.”

Where the power lies is a potential stumbling block for Mr Geithner.

The Federal Deposit Insurance Corporation, which has resolution authority over deposit-taking banks, may end up with the authority but Mr Geithner wants the president, the Treasury and the Federal Reserve to weigh in on any initial decision.

House Republican leader John Boehner said on Tuesday that Mr Geithner’s plan sounded like “an unprecedented grab of power”.

The desire for a broader resolution authority has taken on an added urgency, not least because sweeping powers, particularly over bank holding companies, could be needed following planned stress tests on the largest US banks.

A draft bill is due to be sent to Congress this week, the Treasury said on Wednesday, which would allow the government to “sell or transfer the assets or liabilities . . . to deal with a derivatives book . . . [and replace a] board of directors.

None of these actions would be subject to the approval of the institution’s creditors or other stakeholders.”

John Douglas, a former FDIC counsel and now banking regulation lawyer at Paul, Hastings, Janofsky & Walker, warns that any process that overrides the bankruptcy code could have unforeseen consequences.

“If AIG had gone into bankruptcy there is a well-structured mechanism to figure out who gets paid and who doesn’t get paid. The problem with a government mandated receivership is that the outcomes are not clear.”

For bondholders and other creditors of institutions going through receivership, “there is no mechanism for them to figure out what’s going on in the bowels of the FDIC . . . [That] will impact upon their willingness to lend to institutions on an ongoing basis”.

Alan Avery, a lawyer at Arnold & Porter, believes the FDIC’s “broad authority to repudiate or renegotiate any contract that an institution has entered into” is an appealing power that could save taxpayers’ money.

A minor – but politically attractive – feature of the planned resolution authority is that bonus contracts could be ripped up – preventing a repeat of AIG’s $165m payments to executives that caused public uproar.