Shutdown power sought
WASHINGTON — The Treasury Department unveiled proposed legislation Wednesday that would give it broad powers to shut down big financial institutions, the opening act to overhaul regulation of the nation’s troubled financial system and a move that could pave the way for nationalizing banks.
Treasury Secretary Timothy Geithner will ask Congress today to give him powers similar to those that allow the Federal Deposit Insurance Corp. to seize smaller banks.
The lack of sufficient seizure powers is one reason taxpayers have been asked to bail out insurer American International Group, whose financial operations were deemed too big to fail last September without endangering the global financial system.
"The legislation would authorize the U.S. government, in appropriately limited circumstances, to intervene at the appropriate time to avert the systemic risks posed by the potential insolvency of a significant financial firm," a Treasury statement Wednesday said of the proposal.
While Geithner calls this the power to close troubled institutions, some critics call it pre-emptive bank nationalization.
"The key problem would be finding adequate legal authority to justify the seizure without stretching regulatory discretion so far that it creates panic at other banks or a massive lawsuit," said Douglas Elliott, a researcher at the Brookings Institution.
Geithner’s push for broader powers is the opening move in what’s expected to be a yearlong drive toward revamping federal regulation of the U.S. financial system. Rather than moving one package to overhaul the system, the work will be done in pieces.
Taking questions Wednesday in New York from members of the Council on Foreign Relations, Geithner shot down the idea that an overhaul should wait until the financial crisis has passed payday loan lenders.
"We’re going to do whatever it takes to get through the crisis, but we want to get started now" on regulatory changes, he said, promising "prudential" changes that will limit how much borrowed money financial firms can invest, a practice called leveraging. He also hinted at new requirements for banks to retain more cash to weather storms.
Some changes will be made through the tax code. President Barack Obama has proposed taking away the preferred tax status for private-equity firms and hedge funds, which invest pools of money for the ultra-wealthy. Private-equity and hedge fund managers are compensated through earnings taxed at the long-term capital gains rate of 15 percent, instead of the 35 percent rate that applies to the highest earners of ordinary income.
Other changes could be slower and broader, and could eliminate some agencies through mergers of bank regulators. There also seems to be widespread support for a single agency — perhaps the Federal Reserve Board — to have the authority to act as a "super-regulator" empowered to act against any threat it sees to the U.S. financial system.
The current crisis was brought on partly because many agencies had some regulatory authority over parts of the system, but financial firms exploited gaps.
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