You have to be suspect when financial decision makers start talking about reinventing the game of finance like Treasury Secretary Tim Geithner did today. The first time in recent history was in 1994 when Salomon Brothers bond genius John Meriwether founded hedge fund Long Term Capital Management with a group of ‘financial engineers’ who were set on changing the world, but instead almost brought the world to its knees. The second time was in 2000 when a deregulation crusading senator added a subversive CFTC Modernization provision to a December 2000 spending bill, which led to the rise and fall of Enron/Arthur Andersen then the great credit derivatives boom which literally has brought the world to its knees.
The first major modern era crisis in this never ending quest to “change the game of finance” was brought on by private sector financiers smart enough to subvert the system. The second major crisis had the complicity of lawmakers whether or not they knew it at the time (and was led by a man who was on McCain’s short list for Treasury Secretary—click the CFTC link above). Now Treasury Secretary Tim Geithner has his own game changing agenda, saying:
“To address this will require comprehensive reform,” Geithner said at a House Financial Services Committee hearing. “Not modest repairs at the margin, but new rules of the game.”
Geithner’s proposals would bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.
Let’s hope this agenda takes into account the lessons learned from the last two major efforts in setting new rules of the game.