Geithner: The Regulatory War Ahead

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Geithner also said the government should establish rigorous oversight of the now-murky market for credit default swaps and other complex financial instruments, ensuring that most are traded through exchanges and central clearinghouses. He called for the SEC to "strengthen the regulatory framework" around money-market funds, and he repeated his call, made earlier in the week, to give the executive branch authority to dismantle or reorganize big financial institutions rapidly if they threaten the broader financial system.

Who Would Do the Regulating?

But Geithner didn't spell out what tougher money-market supervision might mean, or which agency would implement it. And in proposing a systemic-risk regulator, he steered clear of naming the agency that would receive broad new powers. While some, including House Financial Services Committee Chairman Barney Frank (D-Mass.), argue for giving the power to the Federal Reserve, others—including Senate Banking Committee Chairman Christopher Dodd (D-Conn.)—are cooler to the idea. Dodd has questioned whether the additional duties would distract from the Fed's existing responsibility for monetary policy and regulating bank holding companies.

Moreover, regulating "leveraged private investment funds" could be tricky. A private equity fund could decide that "from now on, we won't call ourselves a private investment fund, we'll call ourselves a private investment association," Orr noted.

Geithner acknowledged the gaps in his testimony, saying he wanted to concentrate on the substance of the proposals "rather than the complex and sensitive questions of who should be responsible for what."

Beyond laying the foundation of a regulatory reform plan, Geithner continued to make the case for the most detailed part of the proposal, so-called resolution authority that would give the government the ability to dismantle big financial institutions whose failure threatens the entire financial system or the economy.

Something for the G-20

The broader plan, as sketchy as it was, also gives President Barack Obama something to bring to next week's meeting with the heads of other major economies—many of whom have said their top priority is coordinating global financial regulation. Still, the proposal as it stands is unlikely to be detailed enough for European leaders.

And then there's the domestic political angle: Amid mounting public frustration over the U.S. financial bailout, proposals to limit, and potentially dismantle, dangerous financial institutions are likely to resonate, to the Administration's benefit. "They look like they're punishing the bad actors," says Daniel Clifton, a policy analyst with Strategas Research Partners. "The hard decisions will be made down the road."

That populist edge could complicate the usual Wall Street defense mechanism against regulations: sending a flood of lobbying money to sympathetic members of the House and Senate. But overall, Clifton says, little in Geithner's proposal is surprising. "Is it going to be harder for financials to make a profit? Yes," he says. But considering the depth of the anger over the financial crisis, "that was a given," he added.

Federal Regulation of Insurers?

In fielding questions from lawmakers, Geithner did step into one minefield: He said he saw "a good case for an optional federal charter for insurance companies"—immediately drawing praise from large financial institutions, many of which have long lobbied for an alternative to state-by-state regulation of insurance products. But such a move is less popular with many insurance agents and brokers—historically a potent lobbying force—as well as with the state regulators and legislatures that currently oversee the insurance industry.

Ultimately, given the consensus in Washington that flawed regulation helped deepen the ongoing financial crisis, many of the reforms Geithner proposed will come to fruition in one form or another. And that's significant in itself, notes Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents large financial firms.

"There's lots more to be done," Talbott said. "But by the time we're done it will be a sweeping reform."

Francis is a writer in BusinessWeek's Washington bureau.