President Obama's sweeping proposal to overhaul financial regulation is a mixed bag of the attainable and the out of reach.
Certain parts, such as creating a consumer protection agency, giving the government the power to seize systemically important institutions, abolishing the Office of Thrift Supervision and regulating derivatives, appear likely to be enacted.
Other goals are likely to prove too ambitious, including giving the Federal Reserve Board sole authority to police risks to the financial system, eliminating the thrift and specialty charters and dramatically scaling back national banks' preemption powers.
Lawmakers, who are due to grill Treasury Secretary Tim Geithner on the plan in two hearings today, made it clear they are wary of handing the Fed too much power.
"There is not a lot of confidence in the Fed at this point," Senate Banking Committee Chairman Chris Dodd, D-Conn., told reporters after Obama's speech. "I'm stating the obvious over what has happened over the last number of years, so I'm expressing the views of members of my committee, both Democrats and Republicans, who are looking for an alternative."
Standing beside him, House Financial Services Committee Chairman Barney Frank, D-Mass., agreed that the biggest hurdle is likely to be giving the Fed substantial new powers after its performance during the credit crisis.
"Most of what he said is consensus: abolishing the OTS, the consumer product safety, covering derivatives," he said. "I think the key question is, what is the interplay between the Fed and the rest of the regulators on systemic risk?"
Dodd did not rule out supporting the Fed as the systemic risk regulator, but he appeared to lean heavily toward the creation of a systemic risk council to perform that job. Though the Obama administration's plan also calls for the creation of a council, it would be virtually powerless and would not have authority to overrule the Fed.
That did not appear to go far enough for Dodd.
"So I appreciate that the administration has advocated the idea of a council in all of this," he said. "It's certainly worthy of thorough … discussion as to whether or not that is a better alternative than vesting the Fed."
Federal Deposit Insurance Corp. Chairman Sheila Bair has pushed for the creation of a more powerful regulatory risk council that would set rules for systemically important institutions — an idea many in the Senate have favored.
Dodd said he will work closely with Sen. Richard Shelby of Alabama, the lead Republican on the Banking Committee, on any reform legislation.
In an interview, Shelby raised multiple concerns with giving the central bank more authority. He argued that the Fed had not used its existing set of powers adequately before and during the crisis, and that it should not be rewarded for doing a poor job.
"The idea of putting more and more power in the Federal Reserve is, in my judgment, a huge mistake," Shelby said.
"The Federal Reserve cannot be everything to everybody, cannot do everything and do it well as far as a financial regulator," he said. "They have utterly failed the American people as the regulator of the bank holding companies, most of which have gotten into bad, bad trouble financially. They are doing so many things outside the norm that nobody knows — no accountability for — and to run to the Federal Reserve and to say 'Gosh, they are going to be the winner of everything out of all this,' that is just nonsense."
Sen. Robert Bennett of Utah, the No. 2 Republican on the Banking Committee, also raised concerns.
"This is a huge expansion of Fed powers, and my reaction to it was this is an attempt to deal with entities that are 'too big to fail' by creating a regulator that is too big to function," he said.
The concerns over the Fed's authority ar clearly bipartisan. Sen. Mark Warner, D-Va., a member of the Banking Committee, raised similar issues in an interview Wednesday.
"I believe that the best place for systemic risk is not with the Fed, which is too bank-centric, and adding this new responsibility could interfere with its independence, and its major responsibility in monetary policy," he said.
National Economic Council Director Lawrence Summers defended the Fed's proposed role — and its performance during the crisis — in the face of lawmakers' criticism.
"While I don't think there's any place in the regulatory community that doesn't look back on a great deal of what happened with regret," he said during a press conference at the Treasury Department, "I think it's important to recognize that in very important respects, these problems happened in the areas that either the Fed didn't have the opportunity to touch — despite their relationship to systemic responsibility — or where the sort of regulatory arbitrage and competition mechanisms that we're seeking to eliminate enabled people to unconsciously escape Fed jurisdiction."
Lawmakers also jumped on other parts of the plan.
Frank shut the door on scrapping the thrift charter, a move that he said did not make sense.
"We support putting the OTS and the OCC together into one agency, and you want to make sure the thrift charter isn't used to play games with, but I think it would be a mistake to abolish the thrift charter," Frank said.
Bennett raised objections Wednesday to eliminating the industrial loan company charter. Under the plan, all companies with specialty charters, including ILCs, credit card banks and nonbank banks, would be required to divest them within five years.
Bennett's home state of Utah is the primary home to most of the country's 49 ILCs.
"We'll fight this one with everything we've got," he said in an interview. "The Fed has been anxious to have control over the ILCs for a long time. This was a little smack of the [White House Chief of Staff] Rahm Emanuel quote about a crisis is too good 'to waste.' OK, here's a regulatory regime change in a crisis — let's attach a complete ban on ILCs to it, as if ILCs had been part of the problem, because we've never liked them, so here's our opportunity to kill them without having to really make a case."
Senate Majority Leader Harry Reid, D-Nev., whose home state also allows ILCs, is also thought to object to any plan to eliminate the charter.
Still, other elements of the plan appear poised for success. Though the idea of merging the Office of the Comptroller of the Currency and the OTS has been talked about for years, most see it as a given after the current crisis.
"I think most likely to be adopted is going to be the consolidation of the OTS with the OCC," said Joseph T. Lynyak 3rd, a partner at Venable LLP. "The fact that there are already two agencies under Treasury with the ability to tinker with the charter forms, I think that would be high likelihood."
The creation of a consumer protection agency — though one not as powerful as what the administration is seeking — is also likely. Both Frank and Dodd have already voiced support for the idea, and it enjoys wide support among Democrats in both chambers.
But there is expected to be an intense fight over the issue, particularly regarding how much power the new agency is given.
The administration has called for the creation of a consumer protection agency that could write rules for banks and nonbanks, examine them for compliance and take enforcement actions where necessary.
Under the plan, the existing banking agencies would no longer have the power to write consumer protection rules or to enforce them. The new agency would also be given wide latitude to write new underwriting, disclosure and suitability standards for new products, as well as to enforce the Community Reinvestment Act and ot er fair-lending laws. The banking industry argues that such a regime makes no sense, and that breaking apart prudential oversight from consumer protection would be a mistake.
"We think it would create redundancies and potentially overlapping authorities and even inconsistencies," said Steve O'Connor, the head of federal government affairs for the Mortgage Bankers Association. "We believe that prudential regulation for safety and soundness is absolutely consistent with consumer protection. If you have an institution managed for credit risk and exposure and sound underwriting practices, that should be consistent with consumer protection objectives. We think the better place for enhanced consumer protection is with the existing agencies."
Warner also took issue with the idea and suggested he may not support it. "I might need some more convincing of the creation of this consumer protection agency," he said. "The nature of the financial industry has gotten so complex at this point — are you going to end up being almost too constraining? Will this new consumer agency have the knowledge because it won't have the kind of day-to-day exposure to the financial products or the industry that it would have if this agency was actually housed inside the day-to-day prudential regulator?"
Democratic lawmakers have also widely embraced the idea of giving the FDIC stronger resolution powers. Under the plan, the agency would win the power to resolve bank holding companies, while the Treasury would decide the fate of systemically important nonbanks.
After the release of the plan's details, Bair said: "Market participants should understand that large institutions can and will fail, and that an effective resolution mechanism will be uniformly applied to institutions in a fair, transparent and consistent manner."
Though the Obama administration would like to have its plan enacted this year, that seems unlikely. The House is expected to move quickly, but the time table in the Senate looks longer. Dodd is focused more on reforming the health care system, and he is not expected to start trying to move a regulatory bill until the fall — traditionally too late to enact a bill by yearend.
Some lawmakers indicated Congress will take time to work out how all the pieces fit together.
"The issue of structure is going to be debated," said Sen. Jack Reed, D-R.I., a member of the Banking Committee., in an interview. "The relationship between not only this proposed consumer agency but the other federal regulators, the states, what they can do, what they should do. I think our goal would be to provide something that is effective and efficient."
Shelby said the slower the better. "This is very complicated," Shelby said. "We cannot do this in a day or two days. … The worst thing we can do is rush and pass a piece of legislation that nobody has really thought out, that nobody really understands, that will have profound consequences in the future."
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