President Barack Obama on Wednesday announced the most sweeping financial regulatory overhaul since the Great Depression.
His long-anticipated plan reorders how government agencies and entities regulate the financial markets, banks, and other firms to reduce redundancies and create more transparency and accountability. He hopes to prevent another financial collapse like the one that shook the global economy during the past year.
In a speech at the White House on Wednesday afternoon, Obama outlined his plans designed “to protect our consumers and the economy from the devastating breakdown we’ve witnessed in recent years.”
Decrying the financial system of the recent past, Obama said, “It was easy money while it lasted but these schemes were built on a pile of sand.”
The new regulatory structure eliminates the Office of Thrift Supervision, and gives more regulatory powers to the U.S. Department of Treasury, the FDIC, and the Federal Reserve.
The proposal is born out of weeks of intense meetings and brainstorming sessions by administration officials, lawmakers, financial experts and economists. Industry officials, from insurance and banking executives to mutual fund managers, as well as union representatives and consumer and environmental groups also contributed ideas.
“Millions of Americans who acted responsibly have seen their life dreams eroded. Our entire economy has been undermined by that failure,” Obama said.
The plan gives the U.S. central bank—the Federal Reserve—greater authority over large financial institutions that pose a systemic risk to the financial system. The Fed will also oversee institutions that “behaved like banks but chose to be regulated like insurance companies ... or other entities that were under less scrutiny,” the President said.
It also creates a new regulatory council chaired by the Treasury Secretary to work with the Federal Reserve to address system-wide risks.
In addition, Obama will create a new Consumer Financial Protection Agency to oversee consumer financial products such as mortgages and credit cards. It also seeks to protect consumers from inconsistent lending practices and excessive fine print, which some analysts believe were the seeds of the subprime mortgage crisis.
“Those ridiculous contracts with pages of fine print that no one can figure out—those will be things of the past,” Obama promised home borrowers.
Most of Obama’s changes would need approval of Congress, which may add its own measures.
The new regulatory structure is one of the first attempts to regulate and tighten the creation of derivatives and how they are traded in the markets, especially the toxic credit default swaps, which led to AIG’s collapse last year.
The plan would force banks to keep a portion of all securitizations, or the process of turning mortgages into mortgage-backed securities. It would also prevent the sale of such securities to unseasoned investors.
Hedge funds and credit rating agencies would also be under new rules.
Analysts and experts are offering mixed reactions to the regulatory overhaul. Some expected more aggressive measures, especially those targeting toxic assets and derivatives, while others believe the bill would give too much power to the government.
“The Obama administration’s regulatory reform proposal includes many positive features, but it ultimately will not make the financial system safer for the simple reason that it conceals responsibility rather than holding regulators accountable for their failures,” Dean Baker, co-director of the Center for Economic Research, wrote on his Web column.
“The basic story of this crisis was not that the regulatory authorities lacked the ability to rein in this disaster before it was too late. Rather, the basic story is that the regulatory authorities—most importantly the Fed—opted not to use their power to rein in the housing bubble.”
Many banks and hedge funds are already mobilizing their lobbyists in Congress, which determines which measures ultimately make it into the final bill.
“In our view, this plan is as negative for financial firms as the industry feared,” Jaret Seiberg of Concept Capital said in a statement. “Banks either need to charge more for credit—which is unlikely—or accept lower levels of profitability.”
“Our regulatory system is vastly outdated, and we are encouraged by the Administration’s enthusiasm for reform and welcome the opportunity to contribute to this truly important initiative,” Duncan Niederauer, the CEO of NYSE Euronext, Inc., the world’s largest stock exchange, in a BusinessWeek interview.
And in Obama’s own words, he believes that the proposal strikes a good balance.
“I have always been a strong believer in the power of the free market. It has been and will remain the engine of America’s progress,” Obama said in his remarks.
A rebuild of that engine is now underway.
His long-anticipated plan reorders how government agencies and entities regulate the financial markets, banks, and other firms to reduce redundancies and create more transparency and accountability. He hopes to prevent another financial collapse like the one that shook the global economy during the past year.
In a speech at the White House on Wednesday afternoon, Obama outlined his plans designed “to protect our consumers and the economy from the devastating breakdown we’ve witnessed in recent years.”
Decrying the financial system of the recent past, Obama said, “It was easy money while it lasted but these schemes were built on a pile of sand.”
The new regulatory structure eliminates the Office of Thrift Supervision, and gives more regulatory powers to the U.S. Department of Treasury, the FDIC, and the Federal Reserve.
The proposal is born out of weeks of intense meetings and brainstorming sessions by administration officials, lawmakers, financial experts and economists. Industry officials, from insurance and banking executives to mutual fund managers, as well as union representatives and consumer and environmental groups also contributed ideas.
“Millions of Americans who acted responsibly have seen their life dreams eroded. Our entire economy has been undermined by that failure,” Obama said.
The plan gives the U.S. central bank—the Federal Reserve—greater authority over large financial institutions that pose a systemic risk to the financial system. The Fed will also oversee institutions that “behaved like banks but chose to be regulated like insurance companies ... or other entities that were under less scrutiny,” the President said.
It also creates a new regulatory council chaired by the Treasury Secretary to work with the Federal Reserve to address system-wide risks.
In addition, Obama will create a new Consumer Financial Protection Agency to oversee consumer financial products such as mortgages and credit cards. It also seeks to protect consumers from inconsistent lending practices and excessive fine print, which some analysts believe were the seeds of the subprime mortgage crisis.
“Those ridiculous contracts with pages of fine print that no one can figure out—those will be things of the past,” Obama promised home borrowers.
Most of Obama’s changes would need approval of Congress, which may add its own measures.
Securitization and Derivatives
The new regulatory structure is one of the first attempts to regulate and tighten the creation of derivatives and how they are traded in the markets, especially the toxic credit default swaps, which led to AIG’s collapse last year.
The plan would force banks to keep a portion of all securitizations, or the process of turning mortgages into mortgage-backed securities. It would also prevent the sale of such securities to unseasoned investors.
Hedge funds and credit rating agencies would also be under new rules.
Going Too Far, Or Not Far Enough?
Analysts and experts are offering mixed reactions to the regulatory overhaul. Some expected more aggressive measures, especially those targeting toxic assets and derivatives, while others believe the bill would give too much power to the government.
“The Obama administration’s regulatory reform proposal includes many positive features, but it ultimately will not make the financial system safer for the simple reason that it conceals responsibility rather than holding regulators accountable for their failures,” Dean Baker, co-director of the Center for Economic Research, wrote on his Web column.
“The basic story of this crisis was not that the regulatory authorities lacked the ability to rein in this disaster before it was too late. Rather, the basic story is that the regulatory authorities—most importantly the Fed—opted not to use their power to rein in the housing bubble.”
Many banks and hedge funds are already mobilizing their lobbyists in Congress, which determines which measures ultimately make it into the final bill.
“In our view, this plan is as negative for financial firms as the industry feared,” Jaret Seiberg of Concept Capital said in a statement. “Banks either need to charge more for credit—which is unlikely—or accept lower levels of profitability.”
“Our regulatory system is vastly outdated, and we are encouraged by the Administration’s enthusiasm for reform and welcome the opportunity to contribute to this truly important initiative,” Duncan Niederauer, the CEO of NYSE Euronext, Inc., the world’s largest stock exchange, in a BusinessWeek interview.
And in Obama’s own words, he believes that the proposal strikes a good balance.
“I have always been a strong believer in the power of the free market. It has been and will remain the engine of America’s progress,” Obama said in his remarks.
A rebuild of that engine is now underway.
