"Obama Plans to Propose Stronger Financial-Fraud Rules (Update1)
By Rebecca Christie
March 25 (Bloomberg) -- The Obama administration plans to unveil new rules to protect consumers and investors against financial fraud, aiming to stamp out practices that helped cause the mortgage-market crisis.
The administration will also release this week proposed legislation to give powers to the Treasury and Federal Deposit Insurance Corp. to take over failing financial institutions and wind them down.
Treasury Secretary Timothy Geithner said in prepared remarks to a conference in New York today that the plan for a so-called resolution authority would include a mechanism for raising funds to cover related losses.
The U.S. also will coordinate internationally to press for stronger global standards for financial companies, Geithner said in a speech to the Council on Foreign Relations in New York.
New rules on financial fraud “will help us deal in the future with threats like the practices in subprime lending that kicked off the current crisis,” Geithner said.
Banks and other financial institutions need stricter oversight that reins in their ability to damage the overall financial system, Geithner said. He said regulators need new tools to prevent “cascading damage” when financial companies run into trouble, such as higher capital standards and restrictions on the amount of risk they can take on.
To get through the crisis, the U.S. must continue “extraordinary actions” to prop up the financial system and also seek changes to prevent a recurrence, Geithner said. He is scheduled to lay out the administration’s regulatory strategy tomorrow at a House Financial Services Committee hearing.
“This framework will significantly raise the prudential requirements, once we get through the crisis, that our largest and most interconnected financial firms must meet,” Geithner said.
The Treasury chief called yesterday for new authority to seize and wind down failing financial companies in the aftermath of the rescue of American International Group Inc., which has ballooned to $182.5 billion from an initial $85 billion in September. Obama said in a news conference yesterday that he expects the proposal to gain “strong support.”
In details released today, the Treasury said it and the FDIC should be the agencies to trigger either a wind-down of, or financial assistance to, a struggling financial company that isn’t a bank. The plan uses procedures similar to the way the FDIC handles bank failures, without tapping the Deposit Insurance Fund used to safeguard bank deposits.
Instead, the administration will seek new funding mechanisms. This could take the form of a “mandatory appropriation” to the FDIC or a special assessment on financial institutions, the Treasury said."