July 8 (Bloomberg) -- Treasury Secretary Timothy Geithner urged lawmakers to quickly pass legislation enacting President Barack Obama’s overhaul of U.S. financial rules, as Democrats pushed back on plans to expand the Federal Reserve’s powers.

“He gave a very strong argument to move quickly on it while we have the political will to make it happen,” Representative Carolyn Maloney, a New York Democrat, said yesterday after a two-hour, private meeting with Geithner and members of the House Financial Services Committee in Washington.

Geithner outlined the Obama administration’s plan, which would create a Consumer Financial Protection Agency, establish a new authority to unwind large financial institutions and merge two banking agencies into a single regulator. The Treasury secretary, who didn’t speak to reporters, attended the briefing as Congress holds hearings to turn the plan into legislation.

The lawmakers questioned Geithner on the proposal to give the Federal Reserve new authority to monitor institutions that may pose a systemic risk to markets and the economy, Maloney, chairman of Congress’s Joint Economic Committee, said in an interview.

Geithner was pressed about “the powers in the Fed, why were the powers not used more effectively in the past?” Maloney said in recounting the closed-door discussion. “What guarantee is that they would be used more in the future?”

The Treasury secretary told lawmakers the Fed lacks the authority to regulate companies such as insurer American International Group Inc., which needed a U.S. rescue that has expanded to $182.5 billion to avoid a systemic failure, and he said the proposed change “would allow the regulation of all the interconnected areas,” Maloney said.

System ‘Failure’

Geithner, a former president of the Federal Reserve Bank of New York, acknowledged the central bank’s role in the financial crisis, said Representative Randy Neugebauer, a Texas Republican, said after the meeting.

“There was failure throughout the system,” Neugebauer said. “He’s not defending the Fed was Snow White in this situation.”

Neugebauer said lawmakers raised an issue about the policy of “too big to fail,” in which the government must step in to support the companies whose collapse would disrupt the financial markets.

Geithner “in many ways agrees” that the policy needs to be addressed, Neugebauer, a Texas Republican, said in an interview. The government should avoid “a situation where we are picking the companies that are systemically risky,” he said.

Representative Paul Kanjorski, a Pennsylvania Democrat and chairman of the committee’s capital markets panel, said he had reservations about giving the Fed new systemic-risk powers.

‘Failed to Perform’

“There are authorizations and responsibilities that the Fed has had over a number of years now that it failed to perform that went to the very substance of what happened in this disaster that we’ve had,” Kanjorski said in an interview. “I don’t necessarily like the preponderance of power put into one independent agency.”

Representative Scott Garrett, a New Jersey Republican, urged caution on adopting rules for over-the-counter derivatives, the financial instruments derived from stocks, bonds, loans, currencies and commodities.

“You have to recognize that derivatives are used by a substantial number of firms that are out there, that they provide an element to the marketplace that we can’t just close down,” Garrett said. “Anything we do should not be stifling to that marketplace.”

The meeting is the fifth in a series aimed at examining causes of the financial crisis and consider reforms. Previous sessions have featured former Federal Reserve Chairmen Paul Volcker and Alan Greenspan. The event was sponsored by the non- profit Bipartisan Policy Center.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: July 8, 2009 00:01 EDT