New Obama initiative seeks fix to finance regs
Obama to send Congress more work -- a sweeping fix of the nation's financial regulations
Jim Kuhnhenn, Associated Press Writer
On Wednesday June 17, 2009, 8:10 am EDT
Buzz up! Print WASHINGTON (AP) -- President Barack Obama wants to strengthen the government's authority over financial institutions in a sweeping attempt to modernize a regulatory latticework that failed to detect early signs of a worldwide crisis.
The president was to detail the administration's overhaul plan on Wednesday, recommending new powers for the Federal Reserve; a new consumer protection agency to govern lending and credit; and new rules that would reach into currently unregulated regions of the financial markets.
An 85-page draft of the administration's plan details an effort to change a regulatory regime that Obama's economic team maintained had become too porous for the innovations and intricacies of the today's financial markets.
With Congress already embroiled in health care legislation, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year's end.
Obama said Tuesday his administration was going to put forward "a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again."
Meanwhile, Christina Romer, chairman of the White House Council of Economic Advisers, said Wednesday morning the administration's proposal strikes "the appropriate balance" and that it was "not bulldozing the whole system."
But House Republican Leader John Boehner differed with that assertion, predicting "we'll have the federal government deciding what interest ought to be charged on credit cards, having the government decide what kind of financial products are available," the Ohio Republican said.
"I think it's just going to be too big of a foot on an industry that already is having financial problems," Boehner said in an appearance on ABC's "Good Morning America." Appearing on the same program, Romer insisted that wholesale regulatory change is crucial to overall economic health, saying that in the past "there were gaps, there were failures, in our regulatory system, and we need to make it better."
The financial sector and lawmakers from both parties concede the need for significant changes in the rules that govern the intricate and interconnected world of banking and investment. But the details of Obama's proposal already are facing resistance, signaling a tough sell for a president who is spending major political capital on his health care overhaul.
Under Obama's plan, the Fed would gain power to supervise holding companies and large financial institutions considered so big that their failure could undermine the nation's financial system. But even as it gains new powers, the Fed also would lose some banking authority to a new Consumer Financial Protection Agency.
Obama's proposal would require the Fed, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury approval before extending credit to institutions in "unusual and exigent circumstances."
The expanded Fed role and the new consumer regulator are likely to be the two main political flash points in the administration's proposal. Many bankers oppose a new consumer protection regulator and many lawmakers worry the Fed could become too powerful. Friction over those points could slow any major overhaul.
Besides having the Federal Reserve supervise "systemically significant" institutions, Obama will recommend a council of regulators, which would include the Fed, to monitor risk throughout the broader financial system. The arrangement is designed to prevent crashes like those that felled AIG and Lehman Brothers.
In conjunction with the Fed's authority over large financial institutions and the new consumer agency, Obama also will propose:
-- Additional protections for investors, including greater disclosure by hedge funds; regulation of credit default swaps and over-the-counter derivatives that previously operated outside of government oversight; and new conditions on brokers and originators of asset-backed securities.
-- A system for the orderly disposition of any troubled, interconnected firm whose failure poses a risk to the entire financial system, together with rules that insist that financial institutions hold more capital to avoid over-leveraging.
Obama's plan does not attempt major consolidation of turf-conscious regulatory agencies and does not inject itself into an ongoing debate over whether to bring some insurance companies under federal oversight.
"We don't want to tilt at windmills," Obama said on CNBC.
Obama's decision to create a consumer agency comes amid criticism that mortgage lenders and credit card companies have taken advantage of unwitting customers and saddled them with debt.
The new regulator would have the power to demand that customers have the option of simple financial products, to impose fines and to allow states to pass laws that are stricter than the federal standards. Consumer protections are now spread among various state and federal authorities, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission and banking regulators.
Financial lobbyists rallied against the new agency, saying it's impossible to separate bank regulation from oversight of the products they offer.
"We're supposed to be trying to plug holes and connect dots" with the regulatory overhaul, said Scott Talbott, top lobbyist with the Financial Services Roundtable. "The consumer regulator idea moves in the opposite direction."
Sen. Chuck Schumer, D-N.Y., called the new consumer products agency "the cornerstone of regulatory reform." The Fed and other banking regulators, he said, were too focused on the "safety and soundness" of the institutions they oversee, and "did not do a very good job of protecting consumers."
Rep. Bill Delahunt, a Massachusetts Democrat who has helped write a consumer protection bill in the House, said: "Here we are just beginning to extract ourselves from this mess that was on the cusp of total collapse, and the banks don't want further regulations. Give me a break."
The administration will also have to use its political skills to strengthen the Fed. While Democrats generally agree with a need for regulatory changes, many oppose a Fed with expanded powers.
Democratic Sen. Christopher Dodd of Connecticut, chairman of the Senate Banking, Housing and Urban Affairs Committee, has advocated an alternative plan to strip the Fed of its regulatory role entirely and create a new consolidated bank regulator that would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks.
Dodd, however, is a strong proponent of a consumer protection agency and is likely to champion that component of Obama's plan.
Associated Press writers Anne Flaherty, Dan Wagner and Jeannine Aversa contributed to this report.
Federal Reserve: www.federalreserve.gov