By Tim Geithner
Two and a half years ago, with our country on the edge of a second Great Depression, we met with the president in the White House to discuss whether to move in those first months of his administration to legislate fundamental reform of the financial system—or wait until we had put the crisis behind us.
The president made two key decisions. First, he chose to move forward, knowing that the forces of opposition to reform would grow stronger as the memory of the crisis receded. And second, he asked us to write draft legislation rather than propose broad principles. The president did not want the new rules to end up being written by those who brought us to the edge of catastrophic financial failure.
In June 2009, the administration submitted to Congress a proposal that would fundamentally reshape the financial system. It was designed to lay a stronger foundation for innovation, economic growth and job creation with robust protections for consumers and investors and tough constraints on risk-taking. We drew on ideas and insights from reform-oriented thinkers across the political spectrum.
As the Democratic Chairmen of the Senate Banking Committee and the House Financial Services Committee Chris Dodd and Barney Frank initiated negotiations on the bill, we expected backing from both sides of the aisle. Even after that proved impossible in the House, where reform passed initially without a single Republican vote, we remained hopeful that common-sense efforts would garner bipartisan backing. But senior Republican negotiators on the Senate Banking Committee were unable or unwilling to define a core set of reforms they could support. Ultimately, Dodd-Frank passed with only six Republican votes.
Where are we today, a year since the Wall Street Reform and Consumer Protection Act was signed into law?
By almost any measure, the U.S. financial system is in much stronger shape, not just relative to the depth of the crisis but also relative to conditions that prevailed before it hit.
We have recovered most of the investments the government made to put out the fires and avert disaster. While many misperceive the investment made in banks under the Troubled Asset Relief Program as an unfair and unjust gift to the financial sector, we have already turned a profit on these investments, and we may do so on all the government intervention programs. Moreover, these actions have helped to restart economic growth, increase the value of American families’ savings by trillions of dollars, make it possible for businesses to borrow again, and prevent a second Great Depression.
All financial crises are caused by too much leverage, and by reducing leverage, we have taken the most important step toward diminishing the risk of future crises. We have forced the largest financial institutions to take less risk and to hold much stronger financial cushions against the commitments they make. Our banking regulators have reached global agreement on new capital standards that require the world’s largest financial firms to hold roughly three times more capital relative to risk than before the crisis.
And for the first time, we have the ability to extend these types of limits on risk-taking to firms that may not call themselves banks but could still pose catastrophic risk to the economy were they to fail.
The Securities and Exchange Commission, the Commodity Futures Trading Commission and the banking regulators have outlined the major elements of reforms to bring oversight, transparency and greater stability to the $600 trillion derivatives market.
The Federal Deposit Insurance Corporation has developed new tools to safely unwind or break up large nonbank institutions that fail in the future, without exposing the taxpayer to any risk of loss. This framework, together with the tougher capital requirements, derivatives reforms, and the limits in the law on future bailouts will make our system more resilient in crisis. They will also help curb the expectation that taxpayers will in the future step in to save the financial industry from its mistakes.
The Consumer Financial Protection Bureau has already proposed new ways to simplify disclosure of mortgage and credit-card loans so that consumers can shop for the best terms and be protected from abusive and predatory practices. And the president has selected former Ohio Attorney General Richard Cordray to serve as the bureau’s first director, building upon the powerful legacy that Prof. Elizabeth Warren has established in setting up the agency.
Finally, we have started the process of winding down Fannie Mae and Freddie Mac and reforming the overall mortgage market.
We are implementing reform quickly but carefully, and we are taking public input at each step of the way. Because this is complicated work, and because it entails extensive coordination with multiple agencies around the world, some rules are being written more quickly than others. Where we need more time to get the substance right, we will take the time we need.
There is still a great deal of work to do to repair the damage caused by the crisis, and to implement the full framework of reforms. Ultimately, success will depend on making sure that we can write sensible rules that promote the health of the broader economy instead of the interests of individual firms—and that those charged with enforcing these rules have the resources and the talented people they need to do their job.
As we move forward, however, many of those who fought reform during the legislative process are now trying to slow down and weaken rules, starve regulatory agencies of resources, and block nominations so that they can ultimately kill reform.
We will not let that happen. Too many Americans are still suffering from the pain of the financial crisis. We owe them a financial system with better protections against abuse and catastrophic risk. As secretary of the Treasury, I will recommend that the president veto any legislation passed by Congress that would undermine these vital financial protections.
Mr. Geithner is the U.S. Secretary of the Treasury.