Washington, DC – Today, in a hearing before the Senate Banking Committee, Treasury Secretary Timothy Geithner answered questions on the Obama Administration’s proposal to modernize the American financial regulatory system.
In the hearing, Michael Bennet, U.S. Senator for Colorado and a member of the Senate Banking Committee, examined the Administration’s plan for financial reform and asked how the new regulatory framework would prevent or contain financial crises from happening in the future at a minimum cost to the American taxpayer.
Click here or on the image below to view video of Bennet’s exchange with Secretary Geithner.
A transcript of Bennet’s exchange with Secretary Geithner is included below:
SENATE BANKING COMMITTEE HEARING
THE ADMINISTRATION’S PROPOSAL TO MODERNIZE THE FINANCIAL REGULATORY SYSTEM
(June 18, 2009)
Bennet: Thank you Mr. Chairman. Mr. Secretary it’s good to see you. Thank you for your efforts here. Over the last five months or six months or whatever its been, what I’ve discovered is that, with respect to the federal intervention in the immediate crisis, I think it is fair to say there is very little consensus about the details of that or about it as a whole and that I know that presents a huge struggle for you and for the Administration because everybody is in a crisis, but not everybody has to come up with a solution. And I think that you have worked hard to get through a lot of this. I think there is also limited consensus still about what we ought to do to fix the problem we’ve got, prospectively.
What people have come to understand is that we’ve come out of a decade where our savings rate as consumers dropped to zero, the federal debt ballooned from 5 trillion dollars to 10 trillion dollars, and banks or financial institutions on Wall Street that historically had been levered at 12 times were being levered at 24 times and 30 times. All of which, which you said at your testimony at the beginning, when it all came crashing down, it left our families in an unbelievably vulnerable position. Jobs lost. Houses lost. College educations deferred for people all over my state and all over the country. And I know that we’re designing this prospectively, but for the folks watching this at home, if we could rewind the movie that we just had played of a period of an absurd amount of leverage in our economy, of risky decisions that should never have been made by people that should have known better, of risks that were taken actually in plain sight, but we missed it, all of us-in part because of the way our regulatory system was designed. As you rewind that movie in your head-looking that far back-let’s imagine that the regime that you purpose was in place and how would things have been a different result?
Geithner: If what we purposed today been in place, banks would not take on as much risk; institutions that were not regulated banks, would not have been permitted to take on that level of risk; consumers would not have been as vulnerable to the kind of perdition that we saw especially in mortgage products; and the government would have the ability to act earlier, more swiftly, to contain the damage posed by the inevitable pressures that come when firms fail. Again, we want a system where innovation can happen, when firms can fail, where investors are accountable for the risks they take in some sense, but you have to create a system that is strong enough to allow that to happen. That’s a simple way to say banks would not have been able to take on this much risk, you wouldn’t see this much risk build up, leverage build up, outside the banking system to an extent where it endangered the banking system, and consumers would have been less vulnerable to the kind of predation we saw. The federal government would have been able to act sooner.
Bennet: In the combination of the council versus the fed versus the consumer protection agency – who would have detected these things called credit default swaps that are mounting on the balance sheets of our banks and that is a cause for concern and to whom would they have communicated that and what action would have been taken as a result?
Geithner: They were a bit of an orphan in the current structure. Under this regime, we’re giving the SEC and the CFDC much more explicit authority, we are pushing the standardized pieces of those products on to central clearing houses, on to exchanges and transparent electronic trading platforms and giving the SEC better authority to deal with potential manipulation in those areas. That would have helped. If they were behind the curve, failed to act in that context, then the council would have the ability and the authority to bring that to light and to urge them to fix that problem. Under this model, you’re going to have the Secretary of Treasury doing something I don’t believe you’ve ever asked the Treasury Secretary to do, which is to come before Congress on a regular basis and report on evolution of risk in the system and whether the overall system as a whole is doing an adequate job in responding to those risks. Now, we won’t have the full authority that Congress has given regulatory agency – they will each have a piece of responsibility for that, but in some sense you will be able to look at the executive branch and say: Does the whole thing work? Are we dealing with gaps? Are we adapting to emerging risks. I think that will be substantial.
Bennet: Even if all of that left us in the position where a bank holding company found itself in crisis, we then have a new approach to resolution authority as well, is that you’re proposing?
Geithner: We’d have a capacity to act earlier, I think more effectively, possibly at less cost to the taxpayer to contain the damage to the economy.