Tuesday, April 13, 2010

In Which Zandar Actually Agrees With Tim Geithner

Timmy takes to the WaPo today to explain how he's going to stop the next meltdown.  Curiously, the article doesn't begin with "I shall immediately resign due to the fact I helped make this mess worse!" but it does actually offer some quasi-decent advice on what Congress needs to do: set up an independent agency to monitor banks, and give regulators the power to shut down Too Big To Fail banks when then go bad.  Even better -- and I can't believe I'm saying this -- Geithner actually wants derivatives regulated.

Thankfully, signs of bipartisan support for action seem to be emerging in Washington, including for an independent consumer financial protection agency.

That is welcome news. The best way to protect American families who take out a mortgage or a car loan or who save to put their kids through college is through an independent, accountable agency that can set and enforce clear rules of the road across the financial marketplace.

But consumer and investor protection, while critical to reform, are only one part. As the Senate bill moves to the floor, we must all fight loopholes that would weaken it and push to make sure the government has real authority to help end the problem of "too big to fail."

To prevent large financial firms from ever posing a threat to the economy, the Senate bill gives the government authority to impose stronger requirements on capital and liquidity. It limits banks from owning, investing, or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers. And it prevents excess concentration of liabilities in our financial system.

All of that means major global financial institutions -- whether they look like Goldman Sachs, Citigroup or AIG -- will be required to operate with less leverage and less risk-taking.

Crucially, if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts. Instead, we will have a bankruptcy-like regime where equityholders will be wiped out and the assets will be sold.

These are important steps, but they are not enough. Ending "too big to fail" also requires building stronger shock absorbers throughout the system so it can better withstand the next financial storm. To do that, the Senate bill closes loopholes and opportunities for arbitrage, and it brings key markets, such as those for derivatives, out of the shadows.

Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system. 
I mean...this is something of a shock to see the guy who I've been riding as a Wall Street insider since Obama announced he was his pick for Treasury actually come out and publicly advocate for basically everything I've said that we've needed in order to start fixing this problem.

My next question is "What's the catch, Timmy?"  Independent regulatory oversight?  Resolution authority on megabanks?  Derivatives regulation and transparency?  The devil's all in the details there.  Geithner is absolutely correct when he says these need to be done right.  I'm thinking they will not be, and the consequences will be disastrous.

Still, credit where credit is due, and it only took 15 months, too.  Let's see these ideas become real legislation with teeth, Mr. Secretary.  But at least you're finally on the right track.

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