Geithner Pleads For New Super Regulator
March 26, 2009 by Tisa Silver
Filed under Finance
It’s a bird…it’s a plane…it’s Super Regulator!
Photo by Xurbie, courtesy of flickr
Treasury Secretary Tim Geithner is making the case for a new regulatory body with far reaching powers.
This new body, dubbed the “Super Regulator,” would monitor groups and activities which have been flying under the radar for quite some time.
Insurance companies, hedge funds, financial derivatives, and private equity funds would all be subject to the rules of this new regulator.
Let’s take a look at each group:
Insurance companies – If AIG stuck to selling insurance, then insurance companies wouldn’t have been on this list. However, the company dealt in derivatives that went sour and landed the company in its current state.
Hedge funds – These unregulated funds have a deceptive name since the term hedging refers to methods which are supposed to reduce risk. Hedge funds are limited to certain investors and are allowed to engage in activities (i.e. short sales and commodities trading) which regulated funds can not.
Financial derivatives – These are financial contracts linked to the value of other assets. Derivatives can be customized and traded directly between investors and therefore avoid the rules of an exchange. BTW: Warren Buffett once referred to derivatives as “weapons of mass destruction.”
Private equity – These funds typically raise money from institutional investors (because the minimum required investment is substantial) to invest in companies that aren’t publicly traded. Private equity deals can involve leveraged buyouts, distressed investments and venture capital. These investments can be highly risky, but the expectation is that the high risk will be accompanied by high returns.
Possible rules to be enforced by the new “Super Regulator” include requirements for minimum cash reserves and maximum lending levels.
The existing rules obviously left a lot wiggle room for Wall Street to work with. Should there be more rules and regulators or more stringent enforcement of existing rules by the regulators already in place?
This guy is just too easy to pick on…..
Isn’t it ironic that his PPIP solution largely relies on unregulated financial companies to save the regulated financial companies? Is there some kind of subliminal message here that has escaped him?
And if I can sum up his argument, it is roughly this: yeah we have all sorts of regulatory bodies now that failed to see this crisis coming even though many were sounding alarms, but we’ll do better next time, I promise, just give us more power and money, and we’ll crack the whip on those nasty banks and brokers and insurance companies and won’t let them make us look like fools anymore. That about sums it up….
So what happened to Sarbanes-Oxley– sure glad those expensive protections were in place this time. Glad we had the SEC, the Fed, the Treasury, the FDIC, the insurance regulators and other agencies I’ve never heard of all looking out for us to prevent Lehman, Bear Stearns and AIG from imploding. And weren’t these company’s part of his responsibility at the NY Fed?
Bottom line is that morality can’t be legislated or regulated. The white collar crooks will always be several steps ahead of the government in dreaming up innovative ways to rip people off. Geithner is spitting into a strong breeze if he thinks a super regulator a la the UK is going to stop future crises. Some regulatory overhaul is needed as well creating a trading market for some of these exotic financial instruments, but this is no silver bullet. This proposal is mainly a bureaucratic power grab accompanied by a lot of posturing.