Less than a year ago, Treasury secretary Timothy Geithner’s stock was so low in Washington, word on K Street was that he might be on his way out. But that was so yesterday. Now that the worst of the recession appears to be over and the financial reform that bears his stamp has become law, the 48-year-old former president of the New York Fed has more power arguably than any Treasury secretary in history.
And history seemed quite on his mind today as he spoke at New York University’s Stern School of Business. Looking back over the crisis that brought the U.S. to the brink of another Great Depression, Geithner praised his boss for telling his team early on “to err on the side of acting quickly.” Still, the wounds of battle seemed fresh for Geithner, who, in response to a question about the risk of Japanese-style deflation, observed that countries typically wait too long to act “because the political costs of acting with force are always extremely high — no one wants to be in position to take steps that necessarily look like you’re helping the companies that precipitated the financial crisis.”
So, it seemed apt that Geithner, who came from Wall Street and was pilloried by Main Street for bailing out his buds during the crisis, returned to the school that turns out some of the smartest young wizards of Wall Street to ask for a New New Deal. His message: We’ll move swiftly to write the new rules of the financial road. “We have an obligation of speed,” he said. But in return, Wall Street needs to reform itself. “Don’t wait for Washington to draft every rule before you start changing the way you do business,” he warned. What’s at stake, he said, is nothing less than restoring Americans’ confidence in the financial system.
Facing Average Americans
And he’s got a point there. While the stock market rebounded from its March 2009 low, it did so without most average Americans. That may help explain why money continues to flow out of domestic equity funds and into bonds and foreign equity funds. Until there is some bedrock sense of confidence that the markets aren’t rigged against the little guys, they are not likely to come back, and that, of course, is not good for Wall Street, or Main Street, or any incumbent facing voters in November.
For his part, Geithner promised that Treasury would move swiftly to bring clarity to the new rules of finance through a process that’s transparent and collaborative and creates a level playing field among financial institutions within the U.S. and with our foreign competitors. Reform’s ultimate goal, he said, is to “help us rebuild a pro-growth, pro-investment financial system, a system that will allow Americans to save for retirement and to borrow to finance an education or a home, knowing that proper safeguards are in place to prevent firms from taking advantage of them; a system that will help businesses finance growth with less risk.”
Among Treasury’s near-term priorities:• Assembling a conference of experts next month to explore housing finance reform options,
• Laying out an integrated roadmap for the first stages of reform in September,
• Consulting with mortgage companies, consumer advocates and others to develop a new easy-to-understand disclosure form for credit cards, auto loans and mortgages,
• Inviting public comment on new national underwriting standards for mortgages,
• Beginning to work with the Fed, Securities and Exchange Commission (SEC) and Commodities Futures Trading Corporation (CFTC) to move the standardized part of the derivatives market to central clearing houses.
Most important, however, will be reforms aimed at discouraging excess risk-taking and leverage. “All great financial crises are, at their core, cause by excess leverage,” said Geithner. Hence the importance he places on increased capital requirements on the largest financial institutions, as well as more complex interconnected institutions, and firms with risky trading-related assets, said Geithner. That way, our financial institutions should be able to withstand “losses similar to what we saw in the depths of this recession” – without a taxpayer bailout. The transition will be gradual, however. Financial institutions will have until the beginning of 2013 to meet the higher minimum reserve requirements and another several years to build up new capital buffers.
With such sweeping change, you might think that Wall Street would be experiencing the same kind of “wild-eyed alarm” that Time Magazine reported ran through the great financial houses in 1933 after Congress passed legislation creating the Federal Deposit Insurance Corporation. Recalling that story, Geithner observed that their fears proved overblown and the reforms proved to be just what was needed to restore faith in a corrupted system.
This time around, the reaction from Wall Street seems more like a giant sigh of relief that the law was not as onerous to them as they once feared. The question now is whether the rules that Geithner will largely oversee to implement this 2,300-page behemoth will live up to its promise of restoring the average American’s faith in our financial markets, and leaving them and the economy stronger. Let’s hope.