Broader Fed role provokes wide dissent

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By Patrice Hill

President Obama's plan to revamp financial regulations triggered immediate criticism Wednesday from both the political left and right over the expanded policing authorities given to the Federal Reserve while business groups grumbled about a powerful new agency charged with protecting consumers against abusive lending.

The broad plan would step up regulation of nearly every financial institution while extending government control to markets and players such as hedge funds that escaped supervision in the past. But it keeps much of the patchwork quilt of regulatory agencies created in the last century as the government responded to financial crises like the one that precipitated the current overhaul last fall.

The only regulator to get the ax was the Office of Thrift Supervision, whose lax regulation of Countrywide and other freewheeling mortgage lenders helped cause a meltdown in mortgage lending that continues to this day and precipitated the worst global financial crisis and recession since World War II.

The Fed would receive enhanced power to regulate, lend to and close down companies outside its traditional banking domain, if their failure could endanger the economy or financial system. But the Fed would have to get the Treasury's agreement to any rescue that puts taxpayer dollars at risk, and it would lose its power to write regulations protecting consumers against abuses. Those powers would be taken over by the new consumer agency.

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"We did not choose how this crisis began, but we do have a choice in the legacy this crisis leaves behind," Mr. Obama said, blaming a "culture of irresponsibility," a Great Depression-era regulatory system, reckless executive compensation, excessive debt and markets awash in risky financial products.

"An absence of oversight engendered systematic and systemic abuse," Mr. Obama said. "There was far too much debt and not nearly enough capital in the system. And a growing economy bred complacency."

Although the president and his economic advisers came to the conclusion that the Fed was the agency best equipped to police large and interconnected firms operating in far-flung global financial markets, not everyone agreed, and opposition to the expanded role for the Fed was fierce in some quarters.

"There's not a lot of confidence in the Fed at this point" after controversies surrounding the Fed's $182 billion bailout of American International Group Inc., said Sen. Christopher J. Dodd, Connecticut Democrat and chairman of the Senate Banking, Housing and Urban Affairs Committee, which must approve most of the changes proposed by the president.

Sen. Richard C. Shelby of Alabama, the committee's ranking Republican, said the Fed had "utterly failed" as a regulator and that putting it in charge of regulating systemic risk would be piling on too many responsibilities.