The Federal Reserve, already arguably the most powerful agency in the U.S. government, will get sweeping new authority to regulate any company whose failure could endanger the U.S. economy and markets under the Obama administration’s regulatory overhaul plan.
The final plan due to be released on Wednesday — which originally aimed to streamline and consolidate banking and securities regulation in one or two agencies — now is expected to sidestep most jurisdictional disputes and simply impose across the board standards to be applied by all financial regulators, according to administration and industry sources.
The most likely candidate for elimination is the Office of Thrift Supervision, whose failure to detect and forestall problems at Countrywide, IndyMac, Washington Mutual and other freewheeling mortgage lenders is thought to have contributed to the financial crisis.
The decision to concentrate sweeping new powers at the already overstretched Fed is not without controversy. Sen. Christopher J. Dodd, chairman of the Committee on Banking, Housing and Urban Affairs, which must approve any regulatory overhaul, has raised objections to that approach, and so has Federal Deposit Insurance Corp. Chairman Sheila C. Bair.
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Ms. Bair advocates an alternative where a council of top bank regulators would make decisions on whether to step in, regulate or close major corporations like the American International Group whose failure posed a risk to the whole economy and financial system. The Fed stepped in to save AIG last year without having such powers, but the result was a costly and muddled bailout that no one wants to repeat.
To accommodate dissenting views, the administration will propose that a council of regulators advise the Fed, although the Fed will have the final say, according to administration officials. The new powers augment the Fed’s existing broad authorities to intervene to prevent crises that could seriously damage the markets and economy.
“What we’re trying to do is focus on the things that were at the core of the problems we saw in the crisis,” said Treasury Secretary Timothy F. Geithner at a Time Warner Economic Summit in New York on Monday.
“When you have too many people involved, there’s an accountability problem,” he said. “At the core of making the system stronger is to give one place in the system clear accountability, responsibility and authority for preventing future crises.”
Mr. Geithner said that while the administration would have preferred a more streamlined regulatory structure with fewer agencies, ensuring fewer gaps in oversight and less opportunity for “regulatory arbitrage” by lenders, it would have had to start “from scratch” to accomplish that. It decided instead to work within the patchwork of multiple agencies established over the past century or so in response to various financial crises.
While the administration decided against merging the Securities and Exchange Commission and Commodity Futures Trading Commission, it will insist on plugging the extensive gaps that have allowed some of the largest securities markets in world history, known as derivatives, to develop without oversight or regulation.
“All derivatives contracts will be subject to regulation and all derivatives dealers subject to supervision,” Mr. Geithner said in an opinion piece Monday co-authored by National Economic Council Director Lawrence H. Summers, adding that “regulators will be empowered to enforce rules against manipulation and abuse.”
Mr. Geithner said a key part of the plan will impose stiffer requirements for setting aside reserve capital by large financial institutions whose far-flung and risky activities around the world pose the greatest threat of disrupting markets.
Strengthening protections for consumers and investors, possibly through a new commission charged with monitoring the development of new loans and instruments in the marketplace, also will be an important new element of the plan, he said.