The biggest overhaul of US financial regulation since the Great Depression was outlined by the White House today in a politically delicate effort to stop reckless risk-taking, predatory lending and dangerous debt.
In a wide-ranging package intended to prevent a future financial crisis, President Barack Obama set out a list of measures including tougher powers for the Federal Reserve to oversee "too big to fail" banks, registration of hitherto unchecked hedge funds and the creation of a consumer agency to protect the public from incomprehensible small print on loans or mortgages.
Obama cited weak and confused oversight as one of the factors behind the credit crunch: "A regulatory regime basically crafted in the wake of a 20th century economic crisis – the Great Depression – was overwhelmed by the speed, scope and sophistication of a 21st century global economy."
He said the changes were intended to promote innovation and unleash creativity while discouraging recklessness or abuse, adding: "We did not choose how this crisis began but we do have a choice in the legacy this crisis leaves behind."
New authority for the Federal Reserve forms the centerpiece of the plan. The Fed's chairman, Ben Bernanke, has been widely praised for his handling of the financial crisis and the central bank will get responsibility for watching over "systemically significant" institutions where failure would jeopardize the broader financial system.
Other reforms include the introduction of regulation for exotic derivatives such as credit default swaps, blamed for the near-collapse of America's biggest insurer, AIG. New rules will force mortgage companies to hang on to at least 5% of their loans rather than passing on all risk by bundling up products and scrutinizing them on the secondary credit markets.
Yet the shake-up stopped short of a more radical clear-out of the cluttered regulatory universe once envisaged by the White House. There had been calls for the creation of a single financial body akin to Britain's Financial Services Authority to replace Washington's "alphabet soup" of regulators. But the only organization to disappear in the plan will be the Office of Thrift Supervision, which oversaw troubled firms including AIG, Washington Mutual and Countrywide Financial.
Business leaders called for a simpler regime. David Hirschmann, president of the US Chamber of Commerce's centre for capital markets, said: "We're concerned that overall, the proposal simply adds to the layering of the system without addressing the underlying and fundamental problems."
Vigorous lobbying by financial institutions influenced the Obama administration's plans, as did a desire to avoid an all-out war with Republicans in Congress, who are instinctively suspicious of any extension of government power.
John Boehner, the Republican leader in the House of Representatives, expressed skepticism about the prospect of a new consumer regulator, saying he disapproved of the government "deciding what interest ought to be charged on credit cards". He continued: "I think it's just going to be too big of a foot on an industry that already is having financial problems."
The White House indicated that it favored closer international co-operation on financial oversight, a topic which has been energetically promoted by Gordon Brown.
Obama said "gaps between nations" were equally unacceptable as the gaps between regulators within the US. Hedge funds, which have avoided US control by basing themselves in offshore regimes, will have to start reporting to the Securities and Exchange Commission.
Some questioned whether a reshuffling of responsibilities would prevent a repetition of the financial crisis. Peter Morici, business professor at the University of Maryland, said the credit crunch should not be blamed on a lack of regulators but instead on a lack of effective foresight within regulatory agencies.
"The morass being proposed is an example of blind faith in government regulation, much as those who want few strings have blind faith in market discipline," said Morici. "The trick is to get regulation right, not mound it like whipped cream on a banana split."
Others asked why so many regulatory chiefs were still in their jobs. Dean Baker, co-director of the Centre for Economic and Policy Research, said: "The regulators failed and I would say that if we want to prevent the next bubble, we have to hold people accountable for this one. Fire them."
"Battle Brewing On Capitol Hill Over Obama's Proposed Consumer Protection Agency" by Julie Satow, Huffington Post
Consumer groups welcomed President Barack Obama's proposal to create a Consumer Financial Protection Agency as part of his sweeping overhaul of financial regulations on Wednesday. But they worried that the victory could be short lived as the powerful Wall Street lobbies prepare to go to battle to protect their own.
"The financial industry is sharpening its knives, and the question is, will Congress be able to withstand a sustained assault?" asked Travis Plunkett, the legislative director of the Consumer Federation of America.
In anticipation of the confrontation, a coalition of 200 consumer groups announced a day earlier the creation of Americans for Financial Reform, which will fortify their allies in Congress and will work to protect the president's proposal for the new consumer agency.
"The new coalition is what the broad public interest community needs to work together and win," said Ed Mierzwinski, consumer program director of US Public Interest Research Groups.
Consumer groups are applauding the proposed agency, which has been dubbed the CFPA, for strengthening consumer protections. "It is a game changer," said Mierzwinski, "It's the biggest thing since deposit insurance."
Supporters pointed out three key elements in the proposal that will protect consumers -- the stronger role of states in enforcing consumer protection laws, which banks have tended to disregard; the new oversight authority across all types of Wall Street financial products; and the elimination of the long-standing conflict between the needs of financial firms and consumers.
"This proposal provides strong federal oversight, but it also restores the ability of states to enforce strong consumer protection laws," said Kathleen Day, a spokeswoman for the Center for Responsible Lending. States have long been sidelined in the fight for consumer protections because many banks that sell financial products to consumers are federally chartered, and so are only subject to federal oversight.
"What happens currently is that regulators passed rules that said they were the only ones with regulatory oversight over certain banks, and so state laws were preempted," said Ira Rheingold, the executive director of the National Association of Consumer Advocates. "But now, the way we read this, the new consumer agency can declare a floor of basic consumer protection, but the states to take that even further if they choose."
The funding mechanism for the new consumer protection agency is being widely applauded also. Most regulatory bodies are funded from fees paid by the financial institutions they oversee, creating the possibility of a conflict of interest. This can mean that regulatory agencies hungry for funds may offer less oversight in an effort to convince companies to join their charters. Under Obama's plan, this race to the bottom could be eliminated because firms across Wall Street will have to pay fees to the CFPA.
"Companies would often change their charter to be regulated by a more lenient agency, but under Obama's plan, from what we gather, everyone has to pay across the board, eliminating companies from going regulator shopping," Day said.
Supporters of the CFPA also say it will eliminate conflicts of interest among regulators who now wear two hats: regulating for consumer protection, while also overseeing the safety and soundness of the financial firms.
While consumer groups rejoice at what Plunkett calls "an extremely strong proposal," the financial industry has, not surprisingly, been vocal in its opposition.
The American Bankers Association issued a statement that it was "strongly opposed" to the new agency, noting that "banks would be subject to conflicting regulation between safety and soundness and consumer regulation in many instances." It added that the new agency represents "an unprecedented grant of power to mandate business practices" because it can require that certain financial products be made available to consumers while others be barred from consumer consumption.
The US Chamber of Commerce held a press conference earlier this week, denouncing the CFPA in advance of Obama's speech. The Chamber's statement charged that the new consumer agency "cannibalizes regulatory expertise and adds yet another regulatory layer."
Despite this apparent opposition, sources at some banking groups say there are so many aspects of the Obama plan to tackle, they aren't convinced that all of their guns will target the CFPA. Opposing a consumer protection agency, said one official wryly, "sounds really terrible, no matter how you try to spin it."
That said, consumer groups aren't taking any chances at losing the CFPA.
"We have quite a battle on our hands," said Rheingold. "What the consumer agency will end up looking like, and how we isolate the proposal from political influences, will be key."
Barbarians at the gate! Call out the militia! Defend the ordinary citizen!
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