- The Washington Times - Wednesday, June 17, 2009

The Obama administration will propose a new agency to protect consumers from the kinds of lending abuses that led to the collapse of financial markets worldwide, while consolidating the supervision of big banks under one agency in a regulatory overhaul plan to be announced Wednesday.

President Obama will propose consolidating the consumer protection functions of the Federal Reserve Board and other federal agencies into the Consumer Financial Protection Agency (CFPA), which will regulate consumer lending throughout the United States, guided by the principles of transparency, simplicity, fairness, accountability and access, senior administration officials said Tuesday on the condition of anonymity.

“We can’t have a system where bad mortgages are made” and become a dead weight on the financial system for years afterward, said one official.

The new independent agency would be part of a sweeping overhaul of financial regulation that includes granting the Federal Reserve new powers to regulate companies deemed too big or interconnected to fail, such as American International Group Inc., a giant insurer that the Fed said it was forced to rescue from bankruptcy last year in a $182.5 billion taxpayer bailout.

A new council of regulators headed by the Treasury Department would assist and advise the Fed in spotting potential financial problems as they emerge throughout the economy

The plan would eliminate the Office of Thrift Supervision, whose lax regulation of Countrywide, Washington Mutual and other failed mortgage lenders is blamed in part for creating the financial crisis.

The thrift regulator would be combined with the Office of the Comptroller of the Currency into one regulator that would oversee all large and interconnected banks, eliminating opportunities for regulatory “arbitrage” that the free-wheeling mortgage lenders exploited in the past, the official said.

All of the proposals for new agencies would have to be approved by Congress, where leaders of the banking committees are already drafting their own versions of regulatory reform. Certain provisions of the plan, such as the requirement that large banks set aside more capital to cover increased risks from their sophisticated global trading operations, can be imposed administratively without action by Congress.

The consumer protection agency would be responsible for detecting and rooting out risky and deceptive loan instruments like the subprime and exotic mortgages that many homebuyers assumed during the housing boom without understanding that their payments would increase after a period of months or years to levels they could not afford.

Many of those loans are in default today and, combined with the steep drop of housing prices, are threatening the health and solvency of the banks that hold them, in what became the main cause of the banking and financial crisis that continues to this day.

While the new agency would take over regulation of credit cards, mortgages and other products currently regulated by the Fed and other agencies, it would not take over the investor protection functions of the Securities and Exchange Commission, whose mission and structure would remain intact, the official said.

The SEC and the Commodity Futures Trading Commission would be charged with plugging the loopholes in regulation of credit default swaps and other derivative securities that played a big role in the financial crisis, he said.

The consumer agency would have authority to regulate the activities of bank and nonbank financial firms, and would enforce its rules through compliance orders, fines and penalties.

It would supplement, not replace, existing state laws - a scenario that worries many on Wall Street. Financial industry officials say such a system would complicate, not streamline, regulation and result in increased headaches, confusion and problems.

“Creating a new regulatory authority is not a silver bullet for enhanced consumer protection. In fact, it may be a lead balloon,” said David Hirschmann, president and chief executive officer of the U.S. Chamber of Commerce Center for capital markets competitiveness.

Mr. Hirschmann said the chamber would “put up a fight” when it comes to regulations that will add to the layering, duplication and gaps of the current system.

“We need real reform to spur the efficient capital formation needed to secure real long-term economic growth and job creation,” he said.

The creation of a consumer protection agency also would lead to a system in which a financial product and its seller would be regulated by separate agencies - a potential nightmare that could lead to problems going unchecked, say some financial analysts.

“The two regulators will only have half the picture,” said Scott Talbott, head lobbyist with the Financial Services Roundtable, a trade group representing the largest U.S. financial services firms.

“This adds a layer of complexity; this adds more regulation; and this shouldn’t be about more regulation, it should be about more effective regulation.”

Instead of creating a new regulatory agency, Mr. Talbott said he supports strengthening the existing system of regulation.

Many on Wall Street agree with the administration that the industry’s current regulatory system is outdated and broken. They support the administration’s push for reforms such as greater transparency in the derivatives markets, the registering of hedge fund advisers and establishing a platform for greater global regulatory cooperation.

“We need an overhaul of the system,” Mr. Hirschmann said. “We hope the administration has not listened to those who only want to tinker at the edges.”

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