Geithner outlines regulatory changes for financial system

Treasury Secretary Timothy Geithner will ask Congress on Thursday to give him powers similar to those that allow the Federal Deposit Insurance Corp. to seize smaller banks.

WASHINGTON (MCT) - 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 on Thursday 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 that taxpayers have been asked to bail out troubled 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 legislation, which the House Financial Services Committee will consider on an expedited basis.

While Geithner calls this the power to close troubled institutions, some critics call it pre-emptive bank nationalization and warn that it might do more harm than good.

"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," Douglas Elliott, a researcher at the center-left Brookings Institution, said in a paper published Wednesday.

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 a single broad 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.

"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 have more cash on hand to weather storms.

Some changes will be made through the tax code. President Barack Obama already has proposed taking away the preferred tax status enjoyed by 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 that are 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 are likely to be slower and broader, and they could eliminate some government 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 idea of a systemwide risk regulator addresses a central shortcoming. Today's crisis was brought on partly because many agencies had some regulatory authority over parts of the system but financial firms were able to exploit the gaps in regulation. They then took excessive risks that contaminated the entire financial system.