FAR-REACHING REFORMS
Financial overhaul outlined
By Jim Puzzanghera and Walter Hamilton
Los Angeles Times
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WASHINGTON — The Obama administration is proposing the most far-reaching reforms of the financial industry since the Great Depression — including measures that would for the first time regulate hedge funds and give government the power to seize and dismantle companies deemed a threat to the economy.
The measures, which must be approved by Congress, come in the wake of last fall's near-meltdown of the global banking system and in advance of next week's meeting of the Group of 20 economic powers.
The key measures outlined by Treasury Secretary Timothy F. Geithner yesterday include:
"Our system is wrapped today in extraordinary complexity, but beneath all that, financial systems serve an essential and basic function," Geithner told the House Finance Services Committee in a hearing yesterday.
"Financial institutions and markets transform the earnings and savings of American workers into the loans that finance a home, a new car or a college education."
But the system failed in fall 2008, and the government has had to stanch the bleeding of major financial institutions with hundreds of billions of taxpayer dollars, including $182.5 billion in commitments to giant insurer American International Group Inc.
"To address this will require comprehensive reform — not modest repairs at the margin, but new rules of the game," Geithner told the committee. "And the new rules must be simpler and more effectively enforced. They must produce a more stable system, one that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market."
The idea would be to gain some control not only over such Goliaths as AIG, but also such lenders as failed Ameriquest Mortgage Co. in Orange, Calif., once the nation's biggest subprime lender.
As a mortgage company that didn't have insured deposits, Ameriquest escaped any oversight by federal bank regulators, and instead was subjected to varying levels of scrutiny by California and other states. It took a coalition of 49 states' attorneys general to sue Ameriquest over predatory lending practices and win a $325 million settlement.
In some ways, Ameriquest was the tip of the iceberg in the mortgage meltdown that led to the global financial crisis. By imposing tighter regulation on the Wall Street companies that funded lenders like Ameriquest and bundled their loans into now-toxic securities, the Obama administration's plan would aim to reach into such companies and force changes before things get worse.
"It's acknowledging that banks are no longer the only game in town," said Randall S. Kroszner, a former Federal Reserve governor. "A lot of our regulatory framework was based on the view that the traditional commercial banks are the main source of systemwide risk. I think taking a broader perspective and acknowledging that there are many other types of institutions is important."
The Obama administration has been pushing for major regulatory changes, arguing that government officials lack the power and tools to respond to the crisis or prevent it in the first place.
Officials particularly cite the problem of dealing with large financial institutions that are not banks. The federal government has the ability to take over failed banks and sell their assets, but it has no such power with insurers and other financial institutions, such as AIG.
