- The Washington Times - Thursday, December 3, 2009

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 to 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 damage caused will fade.”

As Mr. Geithner addressed the issue of derivatives, House Democrats were clearing a crucial hurdle in their drive to expand the government’s power over Wall Street. The House Financial Services Committee voted to slap new restraints on big Wall Street institutions and to demand greater openness from the nation’s central bank, the Federal Reserve.

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 the 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 derivative, credit default swaps, brought the downfall of Wall Street banking house Lehman Brothers and nearly toppled American International Group Inc., 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.”

“It’s no surprise that you are going to hear participants fighting to weaken these reforms,” he said. “They will work to create loopholes that will help enable them to evade these basic protections.” Sen. Blanche Lincoln, Arkansas Democrat, who chairs the committee, has indicated she may draft a bill to regulate derivatives that would include broad exemptions for end users.

Meanwhile, Sen. Christopher J. Dodd, Connecticut Democrat and chairman of the Senate Committee on Banking, Housing and Urban Affairs, has proposed a derivatives measure with exemptions for end users that are narrower than those in the House legislation.

Mr. Geithner stayed above the fray Wednesday, saying that he has been pleased with the progress Congress has taken so far to reform derivatives regulation.

“Because of the work [of Congress] … we now can see in prospect, I think, a very good chance of a comprehensive set of sweeping reforms to these markets for the first time ever,” he said.

But the secretary warned that the world’s shaky trust in the U.S. financial system won’t improve with significant derivative regulations.

“We have systematic failures in our system of regulation, and we have to work very hard to fix those, and we have a huge obligation to do that,” he said.

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