Warming Up the Crowd

By Lisa Valentine

In an op-ed piece in the June 15 Washington Post, U.S. Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers made the case for Obama’s financial reforms, which the president will provide on June 17.

In the article, Geithner and Summers restrained from blaming financial institutions directly for the current economic mess. Instead, they spread the blame, naming consumers’ seemingly inexhaustible appetite for consumption and therefore debt, the lending practices of subprime mortgage lenders, and the use of murky financial instruments and over leverage by financial institutions as contributors to the problem.

Rather than focus on individual institutions as has been done in the past, Obama plans a systemic approach that will improve the stability of the financial industry as a whole. Part of the plan includes raising the capital and liquidity requirements for all institutions, presumably including those institutions which were never involved in the extreme leverage practices of their neighbors.

In charge of mandating the liquidity and capital requirements is the Federal Reserve.

In a nod to those institutions known as “too big to fail,” Geithner and Summers write that the Obama administration will establish a new authority—not the Federal Reserve—to oversee the quick resolution of a crisis with any financial institution that threatens the stability of the financial system. Perhaps Washington did learn a lesson from the Lehman Brothers collapse.

Institutions outside the banking industry are also facing reform, although noticeably absent from the op-ed is any mention of imposing federal regulations on insurance companies. Securities firms will face “robust” reporting requirements and will be required to have some skin in the game and retain a financial interest in the performance of any owned security. The article also called for other countries to adopt similar measures since our financial systems are globally connected.

Although Geithner and Summers intimated about the extent of the reforms, they gave away few specifics. While there is little doubt that reforms are necessary, a legitimate concern is that these regulations will be so onerous that they impede economic growth and recovery. I’ll report more on the reforms as they are announced on Wednesday.