Bloomberg News

Geithner Says Dodd-Frank Opponents Add to Market Uncertainty

February 09, 2012

Feb. 3 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner criticized opponents of new financial industry regulations and said the first non-banks deemed systemically risky will be named this year.

“Those who are working to slow the pace of reform will only increase uncertainty, and they will damage our efforts to try to get the rest of the world to adopt a level playing field,” Geithner said in Washington yesterday.

Geithner defended the 2010 Dodd-Frank Act and said regulators are “making considerable progress in implementing reform.” The law has come under attack from Republicans in Congress and presidential candidates.

“We have forced a necessary and fundamental restructuring of the financial system,” Geithner told reporters at the Treasury Department. “But even with these changes, and even with the remaining damage caused by the financial crisis, our financial system is once again helping support economic growth by meeting the growing demand for credit and capital at lower cost.”

The financial industry has fought Dodd-Frank, arguing that the regulatory overhaul imposes excessive capital requirements on banks. President Barack Obama and congressional Democrats say it tightens oversight of financial markets and companies in the wake of the credit crisis that led to the 2008 collapse of Lehman Brothers Holdings Inc.

Repeal Dodd-Frank

Republican presidential candidates Mitt Romney and Newt Gingrich have said they would seek to have Dodd-Frank repealed.

Of the 400 rulemaking requirements in the law, regulators as of Feb. 1 had missed the deadlines on 164 of them, according to a report by law firm Davis Polk & Wardwell LLP. Regulators have put into final form 93 of the 400 rules, the report said.

The Financial Stability Oversight Council, headed by Geithner and often referred to by its acronym FSOC, released in October a proposed rule setting standards for determining which non-bank financial firms require Federal Reserve scrutiny.

Banks with more than $50 billion in assets were automatically deemed risky to the financial system in the event of their failure. FSOC is a council of regulators that also includes Fed Chairman Ben S. Bernanke and the chairmen of the Securities and Exchange Commission and Federal Deposit Insurance Corp.

Housing Finance

Geithner also said he will lay out a plan to move forward with broad legislation to replace the GSEs, or government- sponsored enterprises, and overhaul the rest of the housing- finance system. A year ago, he presented a paper that listed three options for the GSEs while refusing to endorse a particular one. Congress has yet to act on broad housing legislation.

“Our plan will wind down the GSEs and bring private capital back into the market, reducing the government’s direct role in the housing market and better targeting our support towards first-time homebuyers and low- and moderate-income Americans,” Geithner said, referring to Fannie Mae and Freddie Mac.

Obama announced on Feb. 1 a package of proposals designed to boost the housing market, his latest effort to reignite the economy after four years of foreclosures and falling home prices.

Fannie Mae

On Jan. 27, the administration announced a revision of the Home Affordable Modification Program, or HAMP, that relaxes the rules on a federal loan-modification program and triples its incentives to banks by paying Fannie Mae and Freddie Mac to forgive debt on homes that have lost value. The Federal Housing Finance Agency has resisted principal reductions and released on Jan. 23 a report saying that forgiving mortgage debt on Fannie Mae and Freddie Mac loans would cost the taxpayer-funded companies almost $100 billion.

“Neither the president or I have the power to compel them to act. What we can do is help explain why it’s in the interest of the taxpayer not just the broader housing market and where we have the chance to create some incentives for that, we’re going to try to do that,” Geithner said.

Geithner criticized the failure of customer account segregation rules, saying they were unable to protect customers from the loss of funds at MF Global Holdings Ltd. The Commodity Futures Trading Commission, SEC, Justice Department and a bankruptcy trustee are investigating MF Global, which filed for bankruptcy protection on Oct. 31.

Geithner also discussed the difficulty of setting rules on foreign financial firms with operations in the U.S.

Tougher Reforms

“Because in some areas U.S. reforms are tougher or just different from the rules forthcoming in other markets, we need to figure out a sensible way to apply those rules to the foreign operations of U.S. firms and the U.S. operations of foreign firms,” Geithner said. “This is very complicated and another example of where we need a clearly articulated common approach across the U.S. regulatory agencies.”

The Dodd-Frank ban on proprietary trading, known as the Volcker rule, has been criticized by foreign governments for its proposed restrictions on trading of sovereign debt.

While foreign government bonds would fall under the rule as proposed, U.S. government debt would be exempt. Officials from Canada, Japan, and the U.K. have sent letters to the Treasury Department and U.S. regulators saying the measure would harm their ability to raise money.

Geithner said the goal of FSOC is not to prevent the failure of an individual firm. Instead, he said the goal is to create an innovative structure that is safer and more robust to resist such failures.

Not Attempting

“We are not attempting to design a financial system that takes out the risk of failure of individual firms who take too much risk,” Geithner said. “That is not possible and it is not desirable.”

The U.S. and European Union are imposing new sanctions to pressure Iran into abandoning any effort to develop nuclear weapons. The 27-nation EU agreed Jan. 23 to bar the purchase, transport, financing and insurance of Iranian oil exports. Geithner said he was encouraged by efforts to reduce dependency on Iran’s oil.

“You’re also seeing very substantial efforts collectively to help tighten the financial sanctions on Iran and we’re going to keep at it, keep working on it, but I think the broad arc of at least the initial response so far is somewhat encouraging,” Geithner said.

--Editors: Kevin Costelloe, Brendan Murray

To contact the reporters on this story: Cheyenne Hopkins at Chopkins19@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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