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.
Analysts from the far left and the far right were even more critical, though banking and Wall Street analysts said the Fed was the most logical choice because of its extensive experience fighting international financial crises.
“Given the spectacular failure of the Federal Reserve to manage our economy over the past decade, any attempt to expand the Feds role should be vigorously opposed,” said Peter Schiff, president of Euro Pacific Capital, who blames the Fed for feeding the housing and credit bubble by engineering low interest rates after the 2001 recession.
“With its cheap money policies and serial bubble blowing, the Fed has proven time and again that it is only able to close the barn door after the entire herd has escaped,” he said.
Barbara Roper, director of the Consumer Federation of America, said an expanded Fed role is appropriate, but “the administration and Congress will need to address concerns that have been raised about conflicts inherent in the governance role bank holding companies play in the regional Federal Reserve Banks, the agencys closed culture and its lack of public accountability.”
White House National Economic Council Director Lawrence H. Summers challenged critics to come up with a better plan. The main alternative offered by the Federal Deposit Insurance Corp. — setting up a committee of regulators to police the marketplace — was rejected by the White House, which gave other regulators only an advisory role.
“Collective responsibility is too often no responsibility,” Mr. Summers said.
Consumer and labor groups lauded Mr. Obama for proposing a tough new regulator to take over enforcement of consumer protection laws often neglected by the Fed and other banking agencies in the past.
Anna Burger, secretary-treasurer of the Service Employees International Union, called the plan a “significant first step,” but added that it does not go far enough and more reform is needed in the mortgage industry.
“We have seen firsthand the impact of an outdated regulatory system that failed to curb the reckless actions of so many financial institutions,” said Ms. Burger, who also is a member of the president’s Economic Recovery Advisory Board.
Groups representing private equity funds, hedge funds, derivatives traders and other financial players that would be regulated or required to register with the Securities and Exchange Commission for the first time seemed open to the plan.
But banks and Wall Street firms grumbled about the harm that could come from a raft of heavy-handed regulations, particularly those expected to emanate from any new consumer protection agency. Banking groups already are lobbying heavily against the most burdensome changes and insist the legislation is unlikely to pass before the end of the year as Mr. Obama wishes.
“Now is a bad time to be distracting banks and financial institutions with new and sometimes nebulous obligations,” said Lily Fu Claffee, a former Treasury attorney now advising banks at Jones Day in Washington. “The system is suffering from gunshot wounds, and a lot of the initiative looks like plastic surgery.”
“This plan contains provisions that are ill-conceived and ultimately bad for consumers, especially those with less than perfect credit,” said Chris Stinebert, president of the American Financial Services Association.
“Focusing regulatory reform on the formation of yet another federal agency … adds another layer of bureaucracy that isnt needed.” He predicted that — far from improving services for consumers — “the result will be limited borrowing choices for consumers and stifled innovation.”
Brian Gardner, Washington analyst at Keefe, Bruyette & Woods, said the new consumer regulator “will ultimately stifle efforts for banks to sell anything other than plain-vanilla-type products” such as 30-year, fixed-rate mortgages. He predicted the proposals will be changed substantially in Congress and nothing will pass for another year.
Treasury Secretary Timothy F. Geithner conceded that the proposals are likely to be modified by Congress.
“We’re redrawing the boundaries of authority. We don’t believe we’ve solved all the problems or got all the details perfect,” he said.
• Sean Lengell contributed to this report.