New regulation is certain.  The failure of private firms to self-regulate in a manner that would provide for the long term stability of the financial system and our country is apparent.  The ability for corporations to choose the amount of regulation imposed upon them by changing the form of their identity has provided an enormous and dangerous loophole.  Take for example hedge funds who have seen their business untouched by the peering eyes of the SEC.  With vast amounts of cash and leverage their activities were allowed to go unchecked and drastically increased systematic risks.  But how much regulation is too much and can regulation take a form that will not stifle financial innovation but instead will encourage it’s progress through careful monitoring?

Tim Geithner, the treasury secretary, today outlined some new ideas going forward for regulation on risk in our country.  The full text can be found here at the WSJ.  One of the basic ideas covered in his testimony was that all financial bodies should face clearer regulation and end the practice of spotty coverage.  He stated that he is encouraging hedge funds and other forms of private capital to register with the SEC and it is my understanding that he will look to make this law.  The Madoff episode struck to the heart of the matter by showing that without the correct oversight the consumer is the adequately protected.

He has also proposed that the federal government for the first time will be regulating the markets for credit defualt swaps and OTC deratives.  He said that he “…will bring unparalleled transparency to the OTC derivatives markets by requiring CCPs and trade repositories to make aggregate data on trading volumes and positions available to the public and make individual counterparty trade and position data available on a confidential basis to federal regulators, including those with responsibilities for market integrity.”

He goes on further to mention the need for stricter monitoring of the money market funds and resolution authority that would deal give the treasury the ability to deal with institutions that are not covered under the FDIC resolution authority such as, “…bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk to our economy.”  Considering that the firm is a threat for systematic risk and is on the verge of bankruptcy the treasury would be able to do a number of things in order to stabilize the firm including placing it under conservatorship.

It is to be seen if the treasury secratary will be granted his entire wishlist by the end of the legistlative editing process but many of these ideas are likely to be seen in one form or another as there seems to be the politcal will.