Testifying before the House Financial Services Committee, Treasury Secretary Timothy Geithner sketched out an ambitious plan to restructure the way financial services firms are regulated.

The administration plan rests on four large pillars: addressing systemic risk, protecting consumers and investors, eliminating gaps in the regulatory structure and fostering international coordination. The pillar with the most urgent implications for insurers seems to be the first. Geithner called for creation of a federal systemic risk regulator imbued with broad powers to monitor companies, including insurers, which pose a systemic risk. Geithner posited that such an entity would require resolution authority, similar to that of Federal Deposit Insurance Corp. (FDIC), to force troubled institutions into receivership or conservatorship.

In his testimony, Geithner took aim at investment banks, hedge funds, rating agencies and regulators for begetting the financial crisis. Insurers did not emerge unscathed either. “The current financial crisis has been amplified by excessive risk-taking by certain insurance companies and poor counterparty credit risk management by many banks trading Credit Default Swaps (CDS) on asset-backed securities,” he said. “Let me be clear: the days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end.”

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