Geithner’s New Regulations

Treasury Secretary Geithner fired his first shots in the re-regulation war. He outlined four areas which the administration considers worthy of attention — Systemic risk (the financial institutions), protecting the consumer, consolidation of the regulatory structure and international cooperation. His testimony today focused on the first.

Here is the outline for his strategy to address systemic risk:

Addressing The First Component of Regulatory Reform: Systemic Risk

  1. A Single Independent Regulator With Responsibility Over Systemically Important Firms and Critical Payment and Settlement Systems
  2. Higher Standards on Capital and Risk Management for Systemically Important Firms
  3. Registration of All Hedge Fund Advisers With Assets Under Management Above a Moderate Threshold
  4. A Comprehensive Framework of Oversight, Protections and Disclosure for the OTC Derivatives Market
  5. New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals

The advantage of having your own blog is that you get to sound off on things like this. In the larger scheme of things it’s not going to make a great deal of difference (this administration by admission doesn’t read blogs) but it sure is a nice way to vent. So, here are my thoughts.

  • No final decisions or votes should be taken on this until after the 2010 elections or until we are completely out of the recession whichever comes later. Think about, debate it, talk to constituents about it but don’t change the rules now. The last thing the country, the citizens or the economy needs is more uncertainty.
  • Please consider not allowing systemically important firms to continue to exist. If we break the systemic guys up into non-systemic guys then they are very likely to be much more careful with their companies. Nothing so focuses a business person as the likelihood of losing everything if you screw up. Systemically important companies don’t have this discipline. A side benefit of adopting a no systemically company allowed policy would be to never have to use the “S” word again.
  • Can the idea of some super all-knowing regulator. He or she doesn’t exist. Never has never will. Vest the Fed or anyone else you care to with most of the authority but don’t expect them to stop the next crisis coming. Let’s not forget that the Fed has to take a big part of the blame for the current situation. As Simon Johnson said, “Regulators get captured and super-regulators get super-captured.”
  • By all means increase capital and risk management requirements. But if you rid the system of any chance of a bailout (see systemically important point above) you will probably find that the participants will do this for you. When you really can lose you tend not to gamble.
  • Lay off the hedge funds and private equity guys. Despite all the whining there is no objective proof that they had a role in causing the crisis. Right now you need them and their money to get us out of this pickle. Remember we’re going to break up all the big guys into lots of smaller “not too big to fail” pieces. The government doesn’t have to run the world. Let’s try and retain a vestige of a free market.
  • By all means get control of derivatives. It’s only been eleven years since Long Term Capital imploded and people started talking about this. You think it might be time to just do it?
  • Do what you will with the money market funds. Just try not to screw up the model too much.

That’s it for now. You are of course welcome to disagree.

more: here

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