WASHINGTON – The Obama administration is proposing an extensive overhaul of financial regulations to increase oversight of such exotic instruments as credit default swaps that have been blamed for contributing to the worst financial crisis to hit the country in seven decades.
Officials said Wednesday that the administration will seek to regulate the market for credit default swaps and other types of derivatives and require hedge funds to register with the Securities and Exchange Commission.
Treasury Secretary Timothy Geithner was scheduled to outline the administration's proposals in testimony Thursday before the House Financial Services Committee. Administration officials provided details of the plan ahead of the testimony only on condition of anonymity.
The program the administration was presenting to Congress will also include a recommendation for creation of a systemic risk regulator, possibly at the Federal Reserve, to monitor risks to the entire system.
The plan also includes a measure that Geithner and Federal Reserve Chairman Ben Bernanke discussed before the committee on Tuesday to give the administration expanded powers to take over major nonbank financial institutions such as insurance companies and hedge funds that were teetering on the brink of collapse.
The administration, pushing Congress to act quickly on its reform agenda, sent Congress a 61-page bill dealing with the expanded powers to seize control of nonbank institutions late Wednesday and the House Financial Services Committee, chaired by Rep. Barney Frank, has indicated it could move on the measure as early as next week.
However, it was unclear how fast the rest of the financial reform agenda might move through Congress. Geithner was providing only a broad outline of the other proposals, with many thorny details remaining to be worked out.
Administration officials promised that the remaining issues would be hammered out in consultation with Congress with the goal of getting legislation approved as quickly as possible.
The administration is proposing that hedge funds and other private pools of capital, including private equity funds and venture capital funds, be required to register with the SEC if their assets exceeded a certain size. The threshold amount has yet to be determined, officials said.
The proposal on credit default swaps and other derivatives would require the markets on which they are traded to be regulated for the first time and for the buying and selling of these instruments to be conducted in a way that will foster greater oversight.
Credit default swaps, which trade in a $60 trillion global market without government oversight, are contracts to insure against the default of financial instruments like bonds and corporate debt. They played a prominent role in the credit crisis that brought the downfall of investment banking giant Lehman Brothers Holdings Inc. last fall and pushed insurance giant American International Group Inc. to the brink of collapse, forcing the government to provide more than $180 billion in support.
Hedge funds, vast pools of capital holding an estimated $1.5 trillion in assets, operate mostly outside of government supervision. As the market crisis deepened last fall, hedge fund selling was widely cited as one of the reasons for increased volatility that pounded stocks and bonds. Hedge funds also suffered huge losses last year, notably from investments in securities tied to subprime mortgages.
The outline of the regulatory reform was being unveiled a week before President Barack Obama was scheduled to meet for discussions among the Group of 20 major industrialized and developing countries in London to assess what needs to be done to deal with the global financial crisis.
The administration is pushing other nations to follow the U.S. lead in putting together sizable economic stimulus programs to jump-start global growth. However, many in Europe are resisting those calls and arguing that the United States needs to do more to toughen financial regulations because they believe the current troubles can be traced to lax regulation in the United States in such key areas as hedge funds and credit default swaps.
The Bush administration resisted calls for tighter regulations in these areas but the Obama administration has signaled its willingness to do more and is hoping that the flaws in current regulations that were exposed by the financial crisis will spur Congress to act.