With time on the legislative calendar running short, Treasury Secretary Timothy Geithner on Tuesday made his best case for Congress to pass the Obama administration’s financial regulatory reform proposal before the year is out.
“We want to get this done as quickly as we can,” Geithner said.
He spoke at a moment at which a new bull market is at work on Wall Street and emboldened financial institutions are seeking to use that new momentum to blunt the pace of reform in Washington.
Geithner knows his window of opportunity to pass a financial overhaul is diminishing. “As you let the memory of the crisis fade,” he said, “It’s easier for people to fight reform. The best strategy our opponents can adopt is to slow things down.”
The Treasury Secretary spoke to a small group of reporters at his Pennsylvania Avenue offices on the one-year anniversary of one of the key moments of the 2008 financial meltdown: The initial House of Representatives vote to reject the Bush Administration’s $700 billion rescue program. That tally, carried live on C-Span on the floor of the stock exchange, horrified Wall Street and sent the Dow Jones Industrial Average plunging by 778 points on September 29, 2008.
Both the topic and the setting for Geithner’s comments showed how far removed Washington is from those vertiginous days of global financial panic a year ago. Geithner, who was not yet in his current job during the financial meltdown of 2008, sat surrounded by the accoutrements of the Treasury Department’s long history: an ornate fireplace, gilt-framed dollar bills from bygone eras, and even a five-shot pistol that once belonged to Al Capone, which is displayed in a wall case.
Geithner said he thinks the administration has the upper hand in the debate. “It’s a very hard argument to make that the system worked and we should just tinker at the margins,” Geithner said. “We must come out of this with a stronger financial system, not a weaker one.”
He said that everything the administration has proposed so far is designed to solve one problem, known as “too big to fail,” in which financial institutions grow so large and interconnected that any one failure threatens the entire financial system. That threat is what forced the Bush and Obama administrations to bail out huge sectors of the financial industry with taxpayer dollars over the past year.
Although some critics have called for Washington to break up the big banks whose failure could threaten the nation’s economy, Obama’s financial team has not pursued that route, instead arguing for a tougher set of standards for the large interconnected banks. The Administration believes that its proposed “resolution authority,” which would allow the government to step in and wind down a failing bank in an orderly way, will help solve the too-big-to-fail problem, because bankers will know that the government doesn’t have to bail them out, it can instead shut them down.
“The most important thing to do is make sure banks and investors don’t live with the expectation the government is going to bail them out,” Geithner said. “We have to make sure we build into our system the capacity to let institutions fail without igniting an inferno.”
The Administration also plans to implement tougher regulatory standards on large interconnected banks, arguing that their potential threat to the global economy means they should be held to a higher standard. But some critics have complained that designating such so-called “Tier 1” institutions creates a government approved list of banks that are too big to fail, which will enable them to attract more capital and out compete their smaller competitors.
The administration counters, however, that the Tier 1 designation is not something banks will want – because it will come with onerous government requirements. “This so-called designation is a burden, not a privilege,” Geithner said.
Financial Services Committee Chairman Barney Frank (D-Mass.) has said he hopes to have the administration’s complete package on the House floor this winter, although he will miss an earlier projected date. “December is the new October,” Frank said.