U. S. Unveils Overhaul Financial System

 

Friday, Mar 27,2009, 2:40:14 PM   Click:

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WASHINGTON_The United States Thursday announced a broad overhaul of financial system in an effort to prevent a repeat of the banking crisis that brought down the powerful and institutions destroyed trillions of dollars of investor wealth.

Treasury Secretary Timothy Geithner said that legislators, the amendments are necessary to correct the faults revealed by the current financial crisis, the worst to hit America in seven decades.

The goal is to repair a system that has proven too unstable and fragile, "he said.

"Over the past 18 months, we faced the most serious global financial crisis in generations," Geithner said in testimony to the House Financial Services Committee. "To meet this need for comprehensive reform . Modest repairs at the margin, but the new rules of the game. "

The administration's proposal, which will require congressional approval, would represent a significant expansion of federal authority over the financial system. It would impose stricter standards on financial institutions deemed to be so big that their failure would represent a risk to the entire system.

It would expand federal regulation, for the first time in all transactions in financial derivatives, exotic financial instruments such as credit default swaps that have been the cause of damage to the merger.

The administration also wants hedge funds greater be required to register with the Securities and Exchange Commission, which would be open to inspection of their books by regulators.


Hedge funds grew explosively in recent years while operating secret. They have attracted a growing number of ordinary investors, pension funds and endowment funds of universities _ meaning millions of Americans unwittingly invest in hedge funds indirectly.

In addition, the administration has proposed the creation of a systemic risk regulator to control the largest institutions. Geithner did not designate such an authority, or resident, but the hotel is planned to support the award of that power to the Federal Reserve.

The plan also includes a measure that Geithner and Fed chairman Ben Bernanke before the Committee examined on Tuesday to give the administration expanded powers to take large non-bank financial institutions such as insurance companies and funds coverage that were on the verge of bankruptcy.

This power was intended to prevent a repeat of the problems of insurance giant American International Group Inc, which triggered a furore last week when it was revealed the company has distributed 165 million in bonuses to employees of its financial products group. The unit specializes in the trading of credit default swaps, instruments that have pushed the company nearly collapsed last fall.

"Let me be clear," Geithner told the committee. "The time when a large insurance company could rely on the house with credit default swaps do not look credible and support to the company or to protect taxpayers must stop."

The administration, pressing for quick action on his reform agenda, sent Congress a bill 61 pages dealing with the broader powers to take control of non-banks on Wednesday.

The House committee, chaired by Rep. Barney Frank, a Massachusetts Democrat, said he could move on the measure next week.

Frank said that the reshuffle should ensure that the government has more options and allows you to avoid repeating the choices it faces unattractive last fall not to let Lehman Brothers, which sent a wave shock to the entire financial system and bail out AIG with billions of dollars.

"We're looking for an alternative method to avoid the extremes," he said.

Though many Democratic lawmakers Geithner expressed support for proposals, the Republicans have asked whether the revision of federal regulations too much power.

"Forgive me if I am a skeptic when I hear that ... if we have a regulatory system, it will never happen again," Rep. Scott Garrett, a Republican of New Jersey, "said Geithner.

Geithner's plan is whether the silence on the consolidation of the rules is necessary. It provides the outline on a large number of initiatives, leaving many thorny details to be worked out in Congress.

Administration officials promised that the remaining issues will be developed in consultation with the Congress in order to get legislation approved as quickly as possible.

The administration wants hedge funds and other private equity funds, including private equity funds and venture capital funds, be required to register with the SEC, if their assets exceed a certain size. The threshold has not yet been determined.

The proposal on credit default swaps and other derivatives, should the markets in which they are traded to be regulated for the first time, and for the purchase and sale of these instruments to be carried out to promote greater surveillance.

Credit default swaps, trade in a $ 60 trillion global market, without government oversight, are contracts of insurance against default of financial instruments like bonds and corporate debt. They played an important role in the credit crisis that brought the collapse of giant investment bank Lehman Brothers Holdings Inc. last fall and nearly include AIG, forcing the government to provide over $ 180 billion in support.

Hedge funds, vast pools of capital with a 1.5 trillion dollars in assets, operate mostly outside of government supervision. As the depth of the market crisis last fall, the sale of hedge funds has been widely cited as one reason for the increase in volatility that hit stocks and bonds. Hedge funds have also suffered huge losses last year, including investments in securities linked to subprime mortgages.

The outline of the reform of the regulation was unveiled a week before the president Barack Obama is scheduled to meet for discussions between the Group of 20 major industrialized countries and developing countries in London to assess what needs to be done to address to the global financial crisis.

Although the administration is pushing other nations to follow the U.S. lead to develop programs to stimulate economic size for starting global growth, many in Europe and to resist such calls, arguing that the United States must do more to strengthen financial regulation. They believe that the current unrest can be attributed to lax regulations of the United States on key areas such as hedge funds and credit default swaps.

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AP Business Writers Marcy Gordon and Daniel Wagner contributed to this report.



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