Tuesday, June 16, 2009

Obama moving cautiously on financial regulation

His economic team appears to have focused on issues directly related to the crisis rather than on a more ambitious overhaul, says Rep. Melissa Bean (D-Ill.) of the House Financial Services Committee.

Reporting from Washington -- Obama administration officials appear to have had two key concerns in writing the most significant financial rules since the Great Depression -- moving quickly, before the momentum for reform evaporates, and avoiding withering turf battles with regulators and lawmakers that could derail the effort.

More details of the plan emerged Tuesday as President Obama prepared to unveil it Wednesday at the White House. A key component will be the creation of a Consumer Financial Protection Agency with "broad authority" over credit cards, mortgages and other consumer products, according to an administration summary.

The administration also has said it wants Congress to give the government new power to monitor the financial system for danger signs and allow it to seize and dismantle large companies at risk of failure in the way that it now does with insolvent banks. The regulatory plan also will include new oversight over largely unregulated derivatives markets and requirements on how banks turn their investments, such as mortgages, into complex securities -- two issues that led to the crisis.

"We are going to put forward a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again," Obama said.

The proposed regulatory overhaul will be far-reaching, administration officials have said. But it is not expected to tackle some key changes that critics have long called for, particularly merging the four existing bank regulatory agencies into one to reduce oversight gaps and to keep institutions from shopping for the most lenient oversight.

Obama's economic team appears to have decided to focus on issues directly related to the crisis, such as providing more oversight over the complex derivatives markets, rather than on an even more ambitious overhaul, said Rep. Melissa Bean (D-Ill).

"They're being very practical and prioritizing what they see as the "gotta do's" that address restoring confidence and market stability because that's where the concerns are and those longer-term comprehensive reforms will be addressed later," said Bean, who serves on the House Financial Services Committee. Congress must approve the administration's proposals.

The administration's approach ruled out creating one super regulator of the financial industry, which probably would have triggered turf fights among the various agencies -- and their constituencies -- that now regulate different aspects of the financial sector.

Instead, Obama is expected to approve a more modest streamlining by eliminating the Office of Thrift Supervision, the regulator for savings and loan institutions that has come under strong criticism for failing to react to warning signs before the failure of IndyMac Bancorp last summer.

Obama has made passing new financial regulations a top priority this year, and delivered a message directly to Wall Street in interviews with CNBC and the Bloomberg news service. He dismissed suggestions that he wanted to over-regulate the financial industry.

"If we've got rules of the road, that's what makes capitalism thrive," he told CNBC. "That's why people invest in this country."

But business groups are concerned that the new regulations might go too far in some areas, such as with the new consumer watchdog agency, and that the administration is attempting to fix problems in the nation's patchwork of regulatory agencies with a piecemeal approach.

"There are too many regulators, too many gaps," said David Hirschmann, president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce. "We're not hung up on who gets merged with who, but you can't leave all the current dysfunction in place."

John Taylor, president of the National Community Reinvestment Coalition, a group that promotes access to basic banking services, said the White House knows it needs to act quickly to seize on momentum for reform generated by the financial crisis. For that reason, administration officials don't want to propose too many changes for fear the legislative process would be bogged down, he said.

"They've got to move swiftly," said Taylor, who has attended four administration meetings over the drafting of the plan. "They can't get stuck in the mud of reinvention of the entire system as the only alternative."