Geithner pushes his financial reforms on Capitol Hill

•Tightening the capital requirements for large financial firms so that they would rein in cyclical tendencies. During a boom, firms would have to set aside more reserves, as a way to curb excesses and provide a cushion for bad times.

•Requiring large hedge funds and other private-investment funds to register with the Securities and Exchange Commission (SEC) and be more transparent to regulators regarding their leverage – or borrowing – and risk.

•Establishing oversight and protections for investments known as derivatives, such as the credit-default swaps that fueled AIG’s collapse.

•Crafting SEC rules to make money-market funds safer, reducing the risk that account holders would panic or face losses in a crisis.

Geithner is the point man in a larger effort by the Obama administration to clarify these goals. Other officials, including Fed Chairman Ben Bernanke, have urged similar steps this month. Mr. Bernanke said the AIG failure could have been handled in a less costly way had the government had the authority to deal with troubled nonbank firms the way the the Federal Deposit Insurance Corp. (FDIC) deals with failed banks.

If other firms falter, such authority might prove useful to regulators before this recession is over.

Regulatory reform can be viewed as the final piece of an overall plan that, Geithner says, will succeed over time in ending the credit crisis. When a congressman asked him earlier this week about the whether a Plan B was needed, Geithner responded confidently.

“This plan will work,” he said. “We just need to keep at it.”

Where this fits in
There are other parts of the plan, which have been announced in recent weeks. They include reviving the housing market by preventing foreclosures and keeping interest rates low, investing in weak banks so they have enough capital to cope with loan losses, and developing a public-private partnership to buy troubled bank assets that have been a cause of investor uncertainty.

After months of worsening economic news, some recent data have made economists optimistic that the economy may hit bottom later this year. Housing-market news has been less grim, and buyers may be encouraged not only by a first-time buyer’s tax credit, but also by mortgage rates that this week fell to historic lows below 5 percent on 30-year fixed-rate loans.

Meanwhile, the stock market has risen strongly this month, and consumer spending has shown signs of stabilizing after a winter plunge.

But it remains unclear whether the Geithner plan will work, and whether banks will be healthy enough to help fuel a strong economic recovery.

Mr. Wyss of S&P, for one, doesn’t share Geithner’s level of confidence that current policies will be effective. But “I’m feeling a little more confident today than I was a month ago,” he says.

Financial experts say that moves to improve the regulatory structure should help the functioning of an industry that plays a vital role in the economy – and that has proved subject to abuses.

One key step, they say, is to make sure that rules do better at covering broad types of activity across a range of firms.

The worst excesses in mortgage lending, for example, arose among less-regulated mortgage brokers with mainstream banks playing a supporting or follow-on role.

Another key could be to reform how bankers are paid and given incentives. Geithner made brief reference to compensation, but this is a tricky issue for Congress to address. The goal might be to set guidelines so that pay depends on managing and reducing risks as well as achieving profit goals.

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