Geithner urges quick action on derivatives

Treasury Secretary Timothy F. Geithner on Wednesday urged Congress to quickly pass legislation to rein in derivatives, the exotic and complex financial instruments that exacerbated the economic crisis.

Mr. Geithner told a Senate panel on Wednesday that regulating derivatives would reduce risk to the financial system and help companies that rely on the instruments save money.

“I don’t think time is with us,” Mr. Geithner said while testifying before the Senate Agriculture, Nutrition and Forestry Committee, which has jurisdiction over certain trade issues. “The longer we wait, the harder it’s going to be; the forces that always fight reform will have better capacity to fight it because the memory of the damaged caused will fade.”

Mr. Geithner and the Obama administration want most derivatives trades to go through a central clearinghouse to bring more transparency to the unregulated $600 trillion market.

The administration’s proposal, which is similar to a measure in House, includes subjecting financial firms dealing in derivatives instruments to new capital requirements.

The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

The collapse last year of one type of derivatives, credit default swaps, brought the downfall of Wall Street banking house Lehman Brothers and nearly toppled American International Group, spurring the government to give the insurance giant $180 billion in taxpayer-funded aid.

But some in Congress fear that tighter government controls on the derivatives market could handcuff financial markets and stunt economic growth.

Some lawmakers want to exempt so-called “end users” — companies that use derivatives to manage risk in their normal course of business — from new requirements in the overhaul legislation.

Sen. Saxby Chambliss, Georgia Republican and the ranking GOP member on the agricultural committee, said he worries that regulating end users would add significant costs for companies that likely would be passed down to consumers. Such action also could prevent some end users from using derivatives at all, denying them a crucial financial safety net.

“I am not sure the lesson of the recent market meltdown warrants increased cost to businesses that had little, if anything, to do with creating this situation,” Mr. Chambliss said.

Sen. Charles E. Grassley, Iowa Republican, told Mr. Geithner that he was “skeptical of regulation” of the derivatives market altogether.

“I think you can have greater transparency without regulation,” Mr. Grassley said.

A powerful coalition of about 170 companies that use derivatives — including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. — has been lobbying Congress to warn that regulation of derivatives without exceptions could increase costs severely for corporate America.

Mr. Geithner urged Congress to “resist these pressures.”

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