Lawmakers picked apart virtually every element of the Obama administration's regulatory reform plan during a hearing Thursday, but there was one question that dominated: Would it really prevent another financial crisis?
"If we have institutions that are 'too big to fail,' have we not failed already, since they create a systemic risk?" asked Sen. Robert Menendez, D-N.J. "I saw the road you traveled here in trying to deal with that in terms of trying to increase capital requirements, but is that really sufficient to get to the heart" of the matter?
Treasury Secretary Tim Geithner countered that the plan would require regulators to develop higher capital requirements, provide power to conduct an orderly unwinding of failing firms, and give a proposed consumer protection agency broad authority to write new rules.
But several lawmakers said those powers were insufficient, and that the current financial crisis was spurred not by a lack of authority, but by the failure of regulators to use it.
"Merely designating someone to do a job does not guarantee a job gets done," said Senate Banking Committee Chairman Chris Dodd, D-Conn.
Granting new authority versus compelling action was a critical theme during the hearing. And several lawmakers raised questions about relying too heavily on the Federal Reserve Board, arguing that it had failed to use the authority it had in the run-up to the current crisis.
"Giving them the power and making them act are two different things," said Sen. Jim Bunning, R-Ky. "What makes you think the Fed will do it better this time around?"
Geithner appeared deliberative in his responses and showed more deference and patience than Henry Paulson, his predecessor. Though Paulson frequently appeared fed up with lawmakers who asked the same question repeatedly in various forms, Geithner often prefaced his responses with "You are right" before politely listing the ways in which he disagreed and then promising to work with Congress.
Still, his manner did little to persuade lawmakers, who disagreed not only with the administration, but also with one another. They disagreed on how much to consolidate regulatory agencies, whether and how to structure a separate consumer protection agency and why certain issues, like what to do the government-sponsored enterprises, were left out of the plan, while others, like eliminating industrial loan companies, were included.
Geithner sought to ease concerns about giving the Fed additional powers, calling it a "modest" expansion of authority and defending the central bank's record by saying it was limited in what it could do.
"When you take powers away from the central bank, it is not an encouraging model," he said. "Other countries are moving away from that direction. Our proposal for the additional authority for the Fed is quite modest and builds upon their existing authority."
During the hearing, several legislators said they supported creating a council of regulators with its own staff and substantial authority over systemically important firms.
But Geithner repeatedly argued that a council would be slow and inefficient.
"That would risk more confusion and less accountability, frankly, to invest in a committee responsibility to enforce those kinds of changes," he said.
Sen. Richard Shelby of Alabama, the Banking Committee's top Republican, was clearly unconvinced. He argued that the Fed itself is a kind of council, including seven Fed governors and 12 regional presidents.
Sen. Jack Reed, D-R.I., argued a similar line, saying the Federal Deposit Insurance Corp.'s board is a kind of council, since its five members includes the heads of two other agencies.
But Shelby also said the Fed was a poor choice to oversee systemic risk.
"I personally think this represents a grossly inflated view of the Fed's" mission, he said. "Basically, the Fed regulates bank holding companies and state banks. As a systemic risk regulator, the Fed would likely have to regulate insurance companies, hedge funds, asset managers, mutual funds and a variety of other financial entities it has never supervised before."
Geithner said Shelby had a grander view of a systemic risk regulator's role than the administration did.
"We did not envision as broad a scope as you just suggested in your question," he said. "Our view is the core institutions at the center of the system require a stronger framework for consolidated supervision and higher capital requirements. At this stage that would largely entail the major banks and investment banks in the country today."
Sen. Charles Schumer was the only member to stand up for giving the Fed systemic risk oversight, saying a council would be too weak. "Everyone will pass the buck, and the buck must stop somewhere," the New York Democrat said. "A council is a recipe for disaster."
But Schumer also faulted other elements of the plan. He asked why the administration stopped short of consolidating prudential supervision in one bank regulator and let the Fed keep state bank supervision. "Why didn't you do more consolidation, and especially why did the Fed keep state banking supervision?" he asked.
Geithner said that the administration tried to prioritize the most necessary reforms to prevent crisis without reinventing the wheel.
"We wanted to make sure that we were focusing on problems that were central to the crisis."
But Sen. Jon Tester questioned that strategy.
"When we have had a crisis like we have had in your own words, the biggest since the Great Depression why not start with a framework that really will be the kind of framework we need going into the 21st century and beyond?" the Montana Democrat asked.
Sen. Robert Bennett, R-Utah, also seized on Geithner's comments to press him on why the administration recommended the elimination of ILCs if they did not play a role in causing the crisis.
"There is not a single ILC that contributed to the crisis, not a single ILC that went down," Bennett said. "Destruction of an industry is not a modest change. You are taking an area that worked and going to abolish it. You are engaged in overkill, in my view."
Sen. David Vitter agreed with that argument but focused it on two other targets: Fannie Mae and Freddie Mac. The Louisiana Republican asked why the administration's plan would postpone until 2011 questions surrounding the future of the GSEs, even though the Treasury secretary agreed that they fueled the crisis.
Geithner had been scheduled to face another grilling from lawmakers in the House Financial Services Committee on Thursday afternoon, but a series of votes on the House floor canceled the hearing. Chairman Barney Frank said he would reschedule that hearing and plans a series of additional hearings during July.