WASHINGTON — Treasury Secretary Timothy Geithner plans to propose today a sweeping expansion of federal authority over the financial system, breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit.
The Obama administration’s plan, described by several sources, would extend federal regulation for the first time to all trading in financial derivatives and to companies including large hedge funds and major insurers such as American International Group. The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on their activities.
Most of these initiatives would require legislation.
Geithner plans to make the case for the regulatory reform agenda in testimony before Congress this morning, the sources said, and he is expected to introduce proposals to regulate the largest financial firms. In coming months, the administration plans to detail its strategy in three other areas: protecting consumers, eliminating flaws in existing regulations and enhancing international coordination.
The testimony will not call for any existing federal agencies to be eliminated or combined, according to the sources, who spoke on condition of anonymity. The plan focuses on setting standards first, leaving for later any reshaping of the government’s administrative structure.
An administration official said the goal is to set new rules of the road to restore faith in the financial system. In essence, the plan is a rebuke to raw capitalism and a reassertion that regulation is crucial to the healthy financial markets and flow of loans.
The government also plans to push companies to pay employees based on their long- term performance, curtailing big paydays for short-term victories.
The administration’s signature proposal is to vest a single federal agency with the power to police risk across the entire financial system. The agency would regulate the largest financial firms, including hedge funds and insurers not currently subject to federal regulation. It also would monitor financial markets for emergent dangers.
Geithner plans to call for legislation that would define which financial firms are sufficiently large and important to be subjected to this increased regulation. Those firms would be required to hold relatively more capital in their reserves against losses than smaller ones, to demonstrate that they have access to adequate funding to support their operations and to maintain constantly updated assessments of their exposure to financial risk.
The designated agency would not replace existing regulators but would gain the power to compel firms to comply with its directives.
