Obama details broad financial reform

[coyotes_geek]

WASHINGTON (CNNMoney.com) -- President Obama on Wednesday unveiled his long-anticipated plan to restructure how banks and other firms are regulated in the hope of preventing another financial collapse.

The far-reaching effort would reorder the roles of some key agencies to try to tighten government supervision of the financial sector. It would also toughen up standards for big financial firms and create a new agency dedicated to consumer protection.

"We did not choose how this crisis began. But we do have a choice in the legacy this crisis leaves behind," Obama is expected to say in a speech around 1 p.m. ET., according to prepared remarks. "So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."

Obama's plan will include a proposal to get rid of the embattled Office of Thrift Supervision and merge it with the Office of the Comptroller of the Currency, according to details released Wednesday.

The OTS has been on the hot seat for months for its role as the overseer of American International Group (AIG, Fortune 500) and failed lenders IndyMac and Washington Mutual. The comptroller's office is a Treasury Department bureau that regulates national banks.

President Obama plans to expand the powers of the Federal Reserve and the Treasury Department.

Obama will call for the creation of a council of regulators chaired by the Treasury secretary to work alongside the Fed to monitor system-wide risk.

The Treasury would also officially keep powers it has already been wielding to approve government action aimed at saving a company that's teetering on the verge of collapse.

In his speech, Obama is expected to say that regulators were charged with "seeing the trees, not the forest."

"As a result, the failure of one large firm threatened the viability of many others; the effect multiplied," Obama is expected to say. "There was no system in place that was prepared for this kind of outcome. And more importantly, no on has been charged with preventing it."

In addition, Obama will propose the establishment of a new watchdog agency aimed at protecting consumers from deceptive or dangerous mortgages, credit cards and other financial products.

The new consumer agency would take on some powers that currently reside with other regulators like the Fed. It will also have the power to make rules and enact them, as well as the ability to inspect "banking and nonbanking" firms, the official said.

"This crisis was not just the result of decisions made by the mightiest of financial firms; it was also the result of decisions made by ordinary Americans to open credit cards, take out home loans and take on other financial obligations," he is to say, according to prepared remarks.

President Obama is expected to explain that the new agency will lay out new rules for home mortgage lending, "so that the bad practices that led to the home mortgage crisis will be stamped out."

An outline of the proposal had emerged by late Tuesday night in administration briefings and an 85-page paper obtained by CNNMoney.com.

Most of the proposals will have to be approved by Congress, which has its own ideas about reforming the financial regulatory structure.

Obama will also acknowledge that his proposal will likely spur controversy.

"There has always been a tension between those who place their faith in the invisible hand of the marketplace -- and those who place more trust in the guiding hand of the government," he is expected to say. "That tension isn't a bad thing."

"We are called upon to recognize that the free market is the most powerful generative force for our prosperity -- but it is not a free license to ignore the consequences of our actions."

Mixed bag for banking industry
Lawmakers have begun hearings on the issue of regulatory reform, but final legislative passage could be a lengthy process, veteran Hill watchers say. The Federal Reserve would get new powers to force big financial firms, including those that aren't even banks, to keep a certain amount of money aside in reserves, widening the firm's financial safety net.

Some in the banking industry say the new capital requirements appear tougher than they had originally thought.

Jaret Seiberg, a policy analyst with Concept Capital's Washington Research Group, called the proposal "worse for the financial sector than was expected." He points out that regulators can require banks to shore up their capital levels even if Congress balks at that piece.

President Obama is expected to defend his plan to empower the Fed to hold banks and large financial firms more accountable, saying that "if you can pose a great risk, that means you have a great responsibility."

A lot of banks and trade associations oppose the new consumer protection agency -- especially the idea of giving it power to curb financial products if they're found to be deceptive or unfair.

"We have a concern creating another regulatory burden, and wonder how they plan on paying for the agency," said Dan Berger, head lobbyist for the National Association of Federal Credit Unions, which otherwise generally supports the reform plan.

But most of the banking industry expected -- and some even called for -- giving the Federal Reserve more powers to monitor systemic risk and setting up a new way to unwind big financial firms.

Scott Talbott of the Financial Services Roundtable said banks "won, tied and lost," in the proposal, pointing out aspects they supported, opposed and could put up with.

And the Financial Services Forum, which represents 17 chief executives, said overall, the proposal appears "comprehensive" and "reasonable," said president Rob Nichols.

"I think this is a great start of the dialogue for what's going to take place on the Hill over the next six months," Nichols said.

Securities and derivatives also on agenda
The White House also aims to tighten up supervision of the securitization markets, requiring firms that originate a security to keep 5% of the "securitized exposure." That means whoever created the financial product would still hold a piece of it, even as it got resold, and would have some interest in its ultimate performance.

The proposal will call for the regulation of all over-the-counter derivatives, including the kind of credit default swaps that led to the collapse of AIG. In addition, officials want to make sure that such products aren't marketed to "unsophisticated" investors.

The Obama plan would address the conflicts of interest that occur when financial firms work with rating agencies to get a golden seal of approval on a financial product.

Rating agencies have been blamed for exacerbating the financial crisis by giving top ratings to bad financial products. The official speaking Tuesday did not offer details as to how rating agency oversight might be toughened.

The Federal Deposit Insurance Corp. could get more power to take over and unwind financial companies, beyond banks, that are in deep trouble. The White House will propose to arm "government with tools to manage the financial crisis," the official said.

http://money.cnn.com/2009/06/17/news...ion=2009061712

[coyotes_geek]

At first glance, things that I like, or can at least tolerate, out of Obama's plan:
1. The watchdog agency to protect consumers from predatory lenders.
2. The requirements to make financial ins uions increase their financial reserves.
3. Regulations of derivatives.

Things that I don't like:
1. Giving more power to the Fed.
2. Government played a role in creating this mess too. But there's no additional oversight or public accountability for them.
3. All the new oversight positions appear to be Presidential appointments. Not a whole lot of checks and balances there.
4. It looks like a lot of new bureaucracy. Do we really need new rules and new departments, or could a lot of this have been handled by actually enforcing all the rules we already have on the books?

[jman3000]

What's going to warrant a government intervention and what isn't? Where exactly are they going to draw the line?

[Winehole23]

The Treasury white paper on regulatory reform.

[coyotes_geek]

What's going to warrant a government intervention and what isn't? Where exactly are they going to draw the line?

Another valid concern. It sure looks like the President and/or his appointees get to decide.

[Bender]

in addition to C-G's points, the "5% exposure" security thing may be good too.

[Winehole23]

It looks like a lot of new bureaucracy. Do we really need new rules and new departments, or could a lot of this have been handled by actually enforcing all the rules we already have on the books?

True, but in this case the primary regulator, OTS, actually helped their regulatory charges skirt capital rules. That's probably why it ended up on the chopping block.

The resulting lack of transparency in the reporting as to the true financial condition of banks made it impossible for the FDIC to take "prompt action" to prevent "any significant risk" to the US taxpayer, though in fairness, the FDIC has seemed little inclined to live up to this responsibility.

[boutons_deux]

The financial system remains corrupt and unaccountable and unprosecuted.

It's all a bunch of window dressing, "le plus ca change ..."

[LnGrrrR]

Color me skeptical.

[MannyIsGod]

Yeah it is more bureaucracy and its needed. I don't know if this is the best solution possible (i doubt it) but the fact is that something is needed. Oversight means bureaucracy and we need a lot of oversight.

[1369]

Quis custodiet ipsos custodes?

[ElNono]

Somehow oversight of the Fed didn't make it...

And whenever I see Barney Frank on TV, I'm immediately thinking:



Whoever still votes for that guy (or Pelosi) needs to stop right now.

[LnGrrrR]

Quis custodiet ipsos custodes?

That sentence would've been much tougher to decode if you swapped around the noun/verb/direct object order