Geithner Stumps for Strong Reform Bill

Treasury Secretary Timothy Geithner used his testimony before Congress on Tuesday to push for strong financial reform measures advocated by Democrats.
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WASHINGTON (

TheStreet

) - Treasury Secretary Timothy Geithner used his testimony before Congress on Tuesday to push for strong reform measures advocated by Democrats.

The House Financial Services Committee is examining the collapse of Lehman Brothers, which happened under Geithner's watch in September 2008, when he served as president of the Federal Reserve Bank of New York. Geithner summed up all the reasons for Lehman's failure, from high leverage and poor risk management, to the "shadow banking system" and derivative products it relied on for funding. He placed blame squarely on Lehman and its management - saying "Lehman caused Lehman's insolvency" - but also faulted a weak regulatory system for allowing the crisis to spiral out of control.

"The rapid growth of this system was fueled by light regulation and weak or nonexistent capital requirements," he said, adding that the new framework "must put in place shock absorbers to contain the damage caused by a major firm's default."

The Obama administration and its Democratic charges in Congress have proposed measures that would closely scrutinize the activities of the banking sector. A key part of the reform effort is tied to

regulating derivatives. It has become an even more important issue now that

Goldman Sachs

(GS) - Get Report

has been charged with civil fraud related to a derivatives transaction in 2007, and other firms are being investigated by regulators here and abroad.

Geithner also focused on "flawed" compensation practices and the lack of an orderly process to wind down large financial firms when they reach the brink of insolvency. He stressed the need for higher capital requirements, and said regulators must be able to scrutinize the financial markets more closely, including new products and areas that emerge down the line.

Though these elements would be addressed in a financial reform bill proposed by Sen. Chris Dodd, and supported by the administration, Republicans appear largely united in their opposition to anything associated with Obama's name. Yet, even as Democrats curry favor with their counterparts on the other side of the aisle, financial reform -- much like the health-care bill -- has a good chance of passing with or without Republican support.

-- Written by Lauren Tara LaCapra in New York

.