New rules to fix US financial system, shares jump on positive news: Economy roundup

US Treasury secretary Timothy Geithner has called for sweeping changes to the way financial services firms operate, such as hedge funds, insurance giants and private equity firms.

In testimony to Congress, Geithner said “comprehensive reform” was needed to guard against future crises.

“Not modest repairs at the margin, but new rules of the game.”

Central to Geithner’s plan is the creation of a single regulator to keep tabs on “systemically important firms” – that is, financial giants whose collapse or risk-taking could threaten the entire financial system.

Currently, hedge funds and private equity firms are largely unregulated, and many commentators believe it was excessive risk-taking by these firms that led to the global financial crisis.

Geithner used the example of American Insurance Group to make the point that companies like insurers were taking huge risks on exotic products like credit default swaps that were barely understood by participants.

“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.”

He also wants to establish a mechanism by which the US Government can step in when one of these systemically important firms is at risk of failing, and either shut it down in an orderly manner or find a buyer.

As with most of the recent plans from the Obama Administration, the devil is likely to be in the detail, and reviews of the Geithner plan are mixed as this stage.

Wall Street enjoyed yet another good night, with the Dow Jones Industrial Average rising 2% on the back of more positive economic data. Electronics retailer Best Buy posted better-than-expected results, prompting hopes of a recovery in the retail sector.

The technology-focused Nasdaq Composite Index surged 3.8% and is now actually higher than at the start of the year.

The positive lead has helped the Australian sharemarket, with the benchmark the S&P/ASX200 rising 48.6 points or 1.3% to 3695.2 points at 12:10 AESDT.

Financial services company AMP jumped 2.1%, while Commonwealth Bank shares are up 1.1%. The other three major banks have fallen slightly, while Telstra has rising around 2% after hitting a record low earlier this week.