Geithner calls for financial overhaul

Timothy Geithner

Mark Lennihan

WASHINGTON — The Obama administration wants to overhaul the country's financial rule book by giving the Federal Reserve increased powers but, bowing to critics in Congress, is backing away from proposals to consolidate various regulatory agencies.

The administration's overhaul plan would make the Fed a systemic risk regulator to oversee large institutions whose failure could threaten the stability of the entire system. It also would create a council of regulators with broad coordination responsibility across the financial system, administration officials said.

The administration also would offer a stronger framework for investor protection, including increased oversight of consumer products ranging from credit cards to annuities, officials said.

Speaking in New York on Monday, Treasury Secretary Timothy Geithner said the regulatory overhaul will eliminate "gaps" in the financial system that encouraged risky behavior leading up to the meltdown.

"We had a financial system that was fundamentally too unstable and fragile, and it did a bad job of basic protection of consumers and investors," Geithner said during an economic conference hosted by Time Warner Inc.

The administration's regulatory proposals were included as part of an opinion piece by Geithner and Lawrence Summers, director of the

National Economic Council, published Monday in The Washington Post.

The administration has backed away from a more extensive overhaul that would have consolidated all banking regulation into one agency. Supporters of this approach, including Sen. Chuck Schumer, D-N.Y., have argued that the current system is inefficient.

The White House said Monday that President Barack Obama would unveil his regulatory overhaul plan Wednesday.

The officials said the administration's overhaul will propose increasing capital and liquidity requirements for all financial institutions and will impose more stringent requirements on the largest and most interconnected firms.

Geithner said the administration would seek to ensure that tougher rules don't bog down the system with red tape.

Scott Talbott, a senior vice president at the Financial Services Roundtable, said his association supports the administration's basic approach but was disappointed that the opinion piece did not mention the need to revamp regulations covering insurance.

The administration's plan will impose "robust reporting requirements" on issuers of asset-backed securities and require institutions that sell them to retain a financial interest in their performance, Summers and Geithner wrote.

The sale of securities backed by subprime mortgages was among the major causes of the financial crisis that struck with force last fall.

Officials said they had no good choices when faced with the potential failure last fall of insurance giant American International Group Inc.

Summers and Geithner said the administration also will work to raise international standards for financial regulation.

The plan was not expected to include administration proposals on the future of Fannie Mae and Freddie Mac, the giant mortgage finance companies that have been operating with infusions of government money after nearly collapsing last fall under the weight of losses from the mortgage bust.