Geithner wants clampdown on derivatives

• Article
• Comments ()
• Click-2-Listen
• Videos

By Sean Lengell

Treasury Secretary Timothy F. Geithner told a congressional panel Friday that "substantially" more regulation is needed to rein in the over-the-counter derivatives market, which he blamed in part for the near-collapse of Wall Street last year.

"Establishing a comprehensive framework of oversight is crucial" in monitoring the complex $500 trillion derivatives market, Mr. Geithner told a joint hearing of the House Financial Services and the House Agricultural committees.

The secretary proposed granting the Securities and Exchange Commission and the Commodity Futures Trading Commission "clear authority for civil enforcement and regulation of fraud, market manipulation and other abuses" in the derivatives market.

Mr. Geithner said that because of a lack of transparency and the ease that over-the-counter derivatives are bought and sold, government regulators were ill-equipped to identify market risk or the extent of the interconnections among large firms.

"Market participants and investors used derivatives to evade regulation, or to exploit gaps and differences in regulation, and to minimize the tax consequences of investment strategies," he said. "The complexity of the instruments that emerged overwhelmed the checks and balances of risk management and supervision."

Over-the-counter derivatives are financial instruments whose value are derived from something else, such as a mortgage-backed security or a commodity like oil, and traded directly between two parities — in contrast to exchange trading.

House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, agreed that "significantly expanding regulation of derivatives" is needed.

Mr. Frank said he expects to draft Mr. Geithner's recommendations into legislation.

But some Republican lawmakers said they are skeptical that a significant overhaul of the derivatives market is needed.

"My fear is that the administration is going down the path of shifting risk not to the investors and the dealers, but ultimately to the taxpayers," said Rep. Spencer Bachus of Alabama, the top Republican on the Financial Services Committee.

Beefing up regulation of the financial markets also has been met with resistance from Wall Street, which fears such action would stifle trade, reduce liquidity and lead to future market meltdowns.