NYT editorial: Questions for Reform

Treasury Secretary Timothy Geithner sounded the right notes last week when he presented a first draft of the administration’s plan to reform the financial system. He said the system had failed “in fundamental ways” and would require comprehensive overhaul. “Not modest repairs at the margin,” he told Congress, “but new rules of the game.”

It is too early to say whether a fleshed-out proposal — and what Congress eventually passes — will amount to a game changer. Some of Mr. Geithner’s proposals do appear aimed at limiting dangers that have lurked for too long in dark corners of the markets. Others may simply preserve Wall Street’s prerogative to party on once the current storm has passed.

For instance, Mr. Geithner called for all large hedge funds and private equity firms to register with the Securities and Exchange Commission, a move that could bring much-needed disclosure and oversight to vast pools of capital that fed the bubble economy. But the S.E.C. would not have the full authority to resolve all concerns. Rather, it would report its findings up what could turn out to be a convoluted chain of regulatory command.

Similarly, Mr. Geithner called for oversight of unregulated derivatives, like the credit default swaps at the heart of the debacle at American International Group. But he made a troubling distinction between “standardized” derivatives and “non-standardized” ones, and proposed different regulation for each. That looks like a loophole disguised as a new rule. Derivatives, now swapped one-on-one, ad infinitum across the financial system, need to be traded on a fully regulated exchange, period.

(More here.)