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Obama proposes big changes to financial-oversight system
He wants new consumer-protection office
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Obama's proposal cheered consumer groups but worried the banking industry.
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Published: June 18, 2009
WASHINGTON
President Obama hoped to head off a new economic meltdown with his sweeping financial "rules of the road" yesterday. But even his own top economic adviser conceded that no plan -- and no president -- can look around the curve to avoid the next crisis.
Administration officials say that their proposal responds to the current crisis-- in national security terms, it prepares them to fight the last war. But they also insist that a central tenet of their plan is a requirement that from now on, financial institutions will have to be better capitalized, the best hedge against another financial collapse.
"I'm not sure that anybody can forecast crises with precision," Lawrence Summers, the director of Obama's National Economic Council, told The Associated Press. "That's why it's going to be critical to raise capital levels for all institutions."
Aimed at preventing a repeat of the worst economic crisis in 70 years, the changes would reverse a determined campaign begun in the 1980s by President Reagan to cut back on federal regulations.
Obama's plan would do little to streamline the alphabet soup of agencies that oversee the financial sector. But it calls for fundamental shifts in authority that would eliminate one regulatory agency, create another and both enhance and undercut the authority of the powerful Federal Reserve.
The new agency, a consumer-protection office, would specifically take over oversight of mortgages, requiring that lenders give customers the option of "plain vanilla" plans with straightforward and affordable terms. Lenders who repackage loans and sell them to investors as securities would be required to retain 5 percent of the credit risk -- a figure that some analysts believe is too low.
In all, the Obama's broad proposal cheered consumer advocates and dismayed the banking industry with its proposed creation of a regulator to protect consumers in all their banking transactions, from mortgages to credit cards. Large insurers protested the administration's decision not to impose a standard, federal regulation on the insurance industry, leaving it to the separate states as at present. Mutual funds succeeded in staying under the jurisdiction of the Securities and Exchange Commission instead of the new consumer-protection agency.
Obama cast his proposals as an attempt to find a middle ground between the benefits and excesses of capitalism.
"We are called upon to put in place those reforms that allow our best qualities to flourish -- while keeping those worst traits in check," Obama said.
The president's plan lands in the lap of a Congress already preoccupied by historic health-care legislation, consideration of a new Supreme Court justice and other major issues. Still, Obama has set an ambitious schedule, pushing legislators to adopt a new regulatory regime by year's end.
"We'll have it done this year," pledged Sen. Chris Dodd, D-Conn., the chairman of the Senate Banking Committee.
"Absolutely," agreed Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee.
But fissures quickly developed.
Dodd, who had been at Obama's side in the East Room of the White House for the announcement, raised questions about one of the plan's key features -- giving the Federal Reserve authority to oversee the largest and most interconnected players in the financial world.
"There's not a lot of confidence in the Fed at this point," Dodd said.
Obama's proposal would require the Federal Reserve, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury Department approval before extending credit to institutions in "unusual and exigent circumstances," a change designed to mollify critics who say that the Fed should be more accountable in exercising its powers as a lender of last resort.
But the proposal also would do away with a restriction imposed on the Fed in 1999 when Congress lifted Depression-era restrictions that allowed banks to get into securities and insurance businesses.
The Fed, as the regulator for the larger financial-holding companies, had been prohibited from examining or imposing restrictions on those firms' subsidiaries.
Obama's proposal specifically lifts that restriction, giving the Fed the ability to duplicate and even overrule other regulators. At the same time, the new consumer agency would take away some of the Fed's authority.
Fed defenders argue that none of the major institutional collapses -- AIG, Bear Stearns, Lehman Bros., Merrill Lynch or Countrywide -- were supervised by the Federal Reserve. Critics argue the Fed failed to crack down on dubious mortgage practices that were at the heart of the crisis.
"Our feeling is that the mortgage crisis points out that consumer-financial regulation has been inadequate," Summers said. "We believe that when that responsibility is given to agencies whose ultimate responsibility is the health of the financial system, they are inevitably going to put the financial system first relative to the interests of consumers."
The key crisis-prevention component of the administration's plan is higher capital standards. That may appear to be a no-brainer: If banks and other large institutions have more money, they won't be vulnerable if their risky bets go bad.
However, banking regulators have been arguing for years over implementation of an international standard for bank capital.
Obama's plan for oversight of the financial industry
• Creates a council of regulators called the Financial Services Oversight Council to monitor risk across the financial system. The council will be led by the Treasury secretary and include the heads of existing federal financial regulators -- the Federal Reserve among them -- and representatives of new regulators.
• Establishes a Consumer Financial Protection Agency to protect consumers from deceptive practices by such companies as credit-card lenders and mortgage brokers.
• Gives new authority to the Federal Reserve to supervise firms considered so big or influential that their failure could topple the economy.
• Creates a system to dismantle a troubled firm. Once the Fed and the Treasury Department decide that an institution is a threat to the economy, the Federal Deposit Insurance Corp. would step in to break it down and sell its assets with minimal impact on investors.
• Establishes a national bank supervisor to monitor all federally chartered banks and federal branches of foreign banks. The Fed and FDIC would retain their existing roles in helping to supervise state-chartered banks.
• Eliminates the Office of Thrift Supervision. Critics say that the office's oversight of American International Group and IndyMac was too lax and contributed to their demise.
• Retains the Securities and Exchange Commission and Commodity Futures Trading Commission as market regulators. However, the SEC would no longer have a role in supervising large holding companies as it did in monitoring Lehman Brothers and Bear Stearns. That role would be turned over to the Federal Reserve.
• Gives the SEC oversight of hedge funds and other private pools of capital, including venture-capital funds.
• Requires financial institutions to retain more capital when making risky investments.
• Calls for regulation of "over-the-counter derivatives," such as the insurance-like contracts that felled AIG. The plan leaves in question who would regulate them.
• Aims to deter lenders from writing bad mortgages and passing off the risk to investors by requiring that lenders retain a 5 percent stake in all asset-backed securities.
• Requires that shareholders get to vote on compensation packages for financial executives.
• Creates an office within the Treasury Department to review the regulation of insurance companies, now done primarily by states.
• Calls on the departments of the Treasury and Housing and Urban Development to make recommendations on the future of government-backed mortgage lenders Fannie Mae and Freddie Mac and the Federal Home Loan Bank system.
THE ASSOCIATED PRESS
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