Faced with mounting criticism from regulators and lawmakers from both parties on the Obama administration's regulatory reform plan, Treasury Secretary Tim Geithner did little last week to address problems with the proposal and gave no sign he was willing to compromise.
Geithner reiterated calls to give the Federal Reserve Board systemic risk oversight, repeating claims it was only a modest increase in power, while insisting that consumer protection oversight must be stripped from banking regulators and placed in a new agency.
Both ideas took heavy fire last week, even from administration allies. And despite a blanket statement that he would continue to work with lawmakers on their concerns, Geithner gave no ground or any indication the administration has planned a new strategy to try and rebuild support.
"I understand the concern you are raising and it's difficult to get the right balance. … We think we got it right," Geithner said.
What made the hearing Friday in the House Financial Services Committee particularly striking is that it is arguably Geithner's best venue to win support. The panel is firmly controlled by Treasury ally Barney Frank leading a solid Democratic majority, and conventional wisdom had suggested that much of the administration's plan would pass through the panel intact, and likely watered down later after negotiations with the Senate. This was especially true for the proposed consumer protection agency, which had been thought to enjoy wide support in the committee.
But several panel members, including a sponsor of a bill to create such an agency, Rep. Mel Watt, D-N.C., hammered Geithner with questions over potential duplication of supervision, liability risks and restrictions on consumer products.
"Will you work with me and us and whoever else to make sure the consumer protection examinations are coordinated with the prudential examination so we don't end up with duplicated exams?" Watt asked. "Will you work with me to make sure that when there is some kind of conflict that there is an appeal or review mechanism? Will you work with me to make sure there is no presumption of liability for products that are not the so-called plain vanilla?"
Geithner said he would work on all three issues, but he offered no specifics on how they might be changed. He said the Obama plan would already address potential conflicts between a new consumer protection agency and banking agencies through a proposed systemic risk council and the new agency's board.
Watt's concerns were seconded by Rep. Carolyn Maloney, D-N.Y., who suggested banking regulators should be allowed to keep at least some consumer protection authority. "I think consumer protection is so important we should have a check and balance," she said. "It would be counteractive and put in jeopardy consumer protection to take away the rights of other agencies."
The heads of the banking agencies, meanwhile, made a similar argument at a second panel, appearing after Geithner. As she had earlier in the week before the Senate Banking Committee, Federal Deposit Insurance Corp. Chairman Sheila Bair said that the banking agencies should retain consumer protection powers and that rule-writing authority should be given to a new agency. The consumer protection agency should have enforcement powers over nonbanks, she said. That position was shared by Comptroller of the Currency John Dugan, who argued that consumer protection and safety and soundness could not be separated without causing problems.
For his part, Geithner did not waver, saying that it is critical to give the new agency broad enforcement powers. "If you give this agency only rule-writing authority and not enforcement, it will be too weak," he said.
As for regulators' arguments against the consumer protection plan, Geithner appeared to dismiss them as efforts to retain turf.
"It's perfectly reasonable and understandable that the institutions that have this authority and have a series of dedicated, motivated, experienced people with that responsibility today are not enthusiastic about giving up that authority," he said.
But Dugan also criticized the proposal because it would effectively end preemption, allowing state regulators to enforce all state and federal law against national and state banks. Dugan said such an outcome would be a disaster.
"Federally chartered banks would be subject to the multiplicity of state operating standards, because the proposal sweepingly repeals the ability of national banks to conduct any retail banking business," Dugan said.
The regulatory opposition did not impress Geithner, who said the status quo had clearly failed when it came to consumer protection.
"We had a long period of testing and it didn't work well," he said.
He was supported by House Financial Services Committee Chairman Barney Frank, who rejected calls to leave enforcement of consumer protection rules with the banking regulators. The Massachusetts Democrat said some of the concerns of community banks could be met by ensuring the new agency and banking regulators coordinated exams. "I'm talking about having all the examinations be on the same day; coordinating examinations," Frank said.
Geithner also gave no sign he was backing down on giving the Fed systemic risk power. Though Bair suggested Thursday that a systemic risk council could be improved to take that role, Geithner reiterated that the Fed should serve as a "single point of accountability for the consolidated supervision of all large, interconnected firms whose failure could threaten the stability of the system."
Observers said Geithner gave no clue as to how he planned to solve problems, but they said it was clear it was a matter of time before the Treasury begins to seek some type of compromise.
"There will be negotiation going on, but I think it will be more discreet," said Brian Gardner, an analyst with Keefe, Bruyette and Woods. "In the end, it always comes down to where votes are."
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