

Bear Stearns was the smallest of the major Wall Street institutions, but it was deeply entwined in financial markets and had the perfect mix of vulnerabilities. It took on too much risk. It relied on billions of dollars of risky short-term financing. And it held thousands of derivative contracts with thousands of companies.

These weaknesses made Bear Stearns the most important initial casualty in what would become the worst financial crisis since the Great Depression. But as we saw in the summer and fall of 2008, these weaknesses were not unique to that firm.

In the spring of 2008, more Americans were starting to face higher mortgage payments as teaser interest rates reset and they could no longer refinance out of them because the value of their homes stopped rising—the leading edge of a wave of foreclosures and a terrible fall in house prices. By the time Bear Stearns failed, the recession was then already several months old, but it would of course get much worse in coming months.

These problems were partly the result of amnesia. There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up outside of the safeguards all economies require.

When the CEO of Bear Stearns called that night, it was not because I was his firm's supervisor or regulator, but because I was then the head of the Federal Reserve Bank of New York, which serves as the fire department for the financial system.







Are the costs of reform too high? Certainly not relative to the costs of another financial crisis. Credit is relatively inexpensive and growing across most of the U.S. financial system, although it is still tight for some borrowers. If the costs of reform were a material drag on credit growth, then loans to businesses would not have grown faster than the overall economy since the law passed and its implementation began.

Are these reforms complex? No more complex than the problems they are designed to solve. And, it should be noted, most of the length and complexity in the rules is the result of the care required to target safeguards where they are needed, not where they would have a damaging effect.

Is there some risk that these reforms will go too far with unintended consequences? That depends on the quality of judgment of regulators in the coming months as they flesh out the remaining reforms. But our system provides considerable protection against that risk, with the rules subject to long periods of public comment and analysis and with room in the law to get the balance right. The greater error would be for Congress or the regulators, under tremendous pressure from lobbyists, to once again exempt large swaths of the financial industry from rules against abuse.

These reforms are not perfect, and they will not prevent all future financial crises. But if these reforms had been in place a decade ago, then the rise in debt and leverage would have been less dangerous, consumers would not have been nearly as vulnerable to predation and abuse, and the government would have been able to limit the damage that a financial crisis could have on the broader economy. President Obama, along with Sen. Chris Dodd and Rep. Barney Frank, deserves enormous credit for pushing for tough reforms quickly.



Mr. Geithner is secretary of the U.S. Treasury.