Geithner calls for new financial regulations to temper risk

Clearer rules and stronger protections are needed in the financial system to limit damage to the nation's economy when large investment banks fail, Treasury Secretary Tim Geithner said Tuesday on Capitol Hill. 

The bankruptcy of Lehman Brothers in 2008 brought the economy to the brink of collapse and exposed major weaknesses within the financial system, including large firms skirting government regulations, Geithner said before the House Financial Services Committee.

"The best strategy is to force the financial system to operate with more transparency and with clear rules that set unambiguous limits on leverage and risk so that taxpayers never have to come in and protect the economy by saving firms from their mistakes," he said. 

Lawmakers are looking into how often Wall Street firms used an accounting device known as Repo 105 that Lehman used to temporarily shift $50 billion in bad assets off its balance sheet. 

Congress has spent the past couple of weeks examining the root causes of the 2008 financial crisis as the Senate continues negotiations on a financial regulatory reform bill that could come to the floor later this week or early next week.  

Securities and Exchange Commission Chairman Mary Schapiro, who also testified, said her agency has asked 19 of the nation's largest banks about the practice. Bernanke, who attended the hearing today, said he wasn't aware that Lehman used Repo 105 but the Fed wasn't the investment bank's primary supervisor although it did provide the firm with funds to stop its failure.       

Lehman Brothers filed the largest bankruptcy in U.S. history in September 2008, sending Federal Reserve Chairman Ben Bernanke and then Treasury Secretary Henry Paulson scurrying up to the Capitol late one evening saying the economy was in dire straits. 

Several weeks later, President George W. Bush signed the Troubled Asset Relief Program, providing $700 billion to stabilize a slew of failing Wall Street firms. 

"Any strategy that relies on market discipline to compensate for weak regulation and then leaves it to the government to clean up the mess is a strategy for disaster," Geithner told the panel.