How Geithner Can Turn His Bad Week to Good
This may not be Treasury Secretary Timothy F. Geithner's best week.
Beset by accusations in a new book that he put Wall Street ahead of Main Street, Geithner (once again) faced a hostile reception on Capitol Hill. During a hearing this morning, lawmakers grilled him about the ballooning Libor rate-fixing scandal and continued to criticize his handling of the 2008 financial crisis.
Yet the most damning blow comes from a report out today detailing the Treasury's failure to regulate AIG, the giant insurer that helped bring the economy to its knees and required a $182 billion bailout in 2008.
The report, by the Office of the Special Inspector General for the Troubled Asset Relief Program, faults a Treasury-led council for failing to determine whether AIG is a "systemically important financial institution" or SIFI -- a designation that would draw the insurer into the Federal Reserve's regulatory regime.
Absent such designation, AIG -- which is still 61% owned by U.S. taxpayers -- continues to operate without federal oversight, an amazing development given that lax regulation is what landed the insurer in hot water nearly five years ago. As the report notes, "the lack of effective regulatory oversight of AIG’s financial business" was a factor in its near-collapse and bailout.
Unfortunately, the problem is much broader than AIG. We've written before that the Treasury-led Financial Stability Oversight Council has taken far too long to determine which non-bank financial firms should be designated systemically important and subject to tougher standards, including higher capital requirements.
After nearly 18 months of debate, the council finally agreed in April on the criteria it will use to determine which firms deserve that designation. More than three months later, the council still has not tagged a single insurer, hedge fund, private-equity shop or money market mutual fund as systemically important. The shadow banking system continues to operate in the dark.
At Wednesday's hearing, Geithner seemed unconcerned with the pace, saying the stability council is "carefully examining" which firms should be designated. To which I ask: How much more examination could possibly be needed? AIG itself has determined it will likely be designated a SIFI, telling investors it's preparing for the regulatory requirements associated with that distinction.
It can't possibly take this long to figure out which other large, interconnected nonbank financial firms pose threats to the financial system and should be more highly regulated. Waiting to designate these companies exposes the U.S. financial system -- and taxpayers -- to unnecessary risk. This is especially true given global economic tumult: Are any large, nonbank firms so highly exposed to Greece, Spain or other EU countries that their collapse could ripple through the U.S. economy? I'm betting that's a question few of us are willing to leave to chance.
Geithner has made no secret of his plans to leave the administration at the end of President Barack Obama's first term. Rather than continuing to defend his actions during the last financial crisis, Geithner should use his remaining few months to prevent the next one from occurring.
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