The expletive-laden rant Treasury Secretary Tim Geithner unleashed during a closed meeting with regulators on Friday, July 31, has players in Washington and on Wall Street wondering one thing: What got the usually mild-mannered Geithner so incensed? Establishing a new regulatory framework for the financial markets is not the kind of politically charged, life-or-death issue that should drive a normally discreet Cabinet member to go on a blue streak in front of dozens of officials. But Geithner and the Obama Administration have more at stake in getting reform pushed through Congress by the end of the year than it may seem.
The tense meeting, first reported by the Wall Street Journal, took place at the Treasury department Friday afternoon and was attended by top regulators from all the major oversight bodies, including the FDIC, the Office of the Comptroller of the Currency, the SEC, the Commodities Futures Trading Commission, the Fed and others. As he talked about the state of the Administration's proposal introduced last spring, Geithner started swearing about the need for regulatory reform to move forward. "There was liberal use of expletives," says an official briefed on the meeting. "Obviously it made some people uncomfortable."
Senior officials say the harsh language was intentional. "We talked about it beforehand and intended to deliver a message," says a senior Treasury official. Both on Capitol Hill and in the regulatory agencies, Geithner felt, the "searing experience" of last fall's near meltdown of the global economy was falling prey to inertia and in some cases lobbying. "The reality is that there are pretty powerful vested interests fighting this," says the senior Treasury official. "It's not the entire industry, but they have an interest in fighting change."
Regulatory reform has been a relatively low-profile issue for the Administration, compared with health care, the stimulus bill and cap-and-trade legislation. But substantively, Obama and Geithner's proposal has the potential to dramatically change the way America does business. The two men have proposed creating a consumer-financial-protection agency that would have broad power to police financial firms by, for instance, ensuring they are complying with rules protecting consumers from things like predatory lending and deceptive practices. Geithner also wants to consolidate the work of some of the regulators, in particular giving broad new authority to the Federal Reserve to police Wall Street. He would like to impose new oversight on hedge funds and derivatives and give government the power to close large failing nonbank financial institutions before they can threaten the entire system, as happened with AIG less than a year ago.
Obama and Geithner have met stiff resistance from both the semi-independent regulators and Capitol Hill. "No one's supporting the Administration proposals," says a senior official at one of the regulatory agencies. "Everyone's opposed in one way or another." Some Senators, including the banking committee's top Republican, Richard Shelby, dislike the broad regulatory and oversight powers of the consumer-protection agency and are strongly opposed to increasing the power of the Federal Reserve. Other regulators, like the FDIC and the Comptroller of the Currency, don't want to lose their power to supervise banks and financial institutions in the consolidation that Geithner has proposed.
The Administration's arguments for the substance of their proposals mask political concerns as well. With Obama's health-care reform and cap-and-trade legislation facing uncertain futures, the White House may need a win on one big issue by December. "What's [the media] going to say about Obama's first year?" says another top regulatory official. "If I were the Administration, I'd want to get to the Rose Garden with something, something that looks significant."
If regulators and politicians are slowing the process, though, it doesn't mean there's no movement. The House, with its solid majority of Democrats and tight control by Nancy Pelosi and House Financial Services chief Barney Frank, is expected to move legislation early in the fall. Senator Chris Dodd, the Senate Banking Committee chairman, faces a tough re-election battle in 2010 and has every reason to push for a bill. His GOP counterpart, Shelby, is a potential obstacle, but aides say the 75-year-old Senator recognizes the need for change: no one wants a taxpayer-funded bailout like TARP to be the answer every time there's a crisis. And it may be the best opportunity Shelby has in the remainder of his career to get a major piece of legislation written. All players expect the Senate version to be dramatically different from Geithner's proposal, possibly including a single regulator rather than the Treasury Secretary's preferred trio.
Any substantive bill may be good enough for Geithner, who may have the most at stake. He survived the terrible start of his tenure at Treasury and managed to lead the Administration's efforts to stabilize the markets under constant attack. But he continues to struggle with the impression that he is soft on Wall Street, having come from the New York Fed (and having played a part in the crisis dealings with Lehman Brothers and AIG last fall), which is considered more sympathetic to the financial industry than some Washington overseers. To truly succeed as Treasury Secretary, insiders say, Geithner needs to show not only that he can rescue the industry but that he can tame it as well.