New US financial rules to tighen oversight

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(Agencies)
Updated: 2009-06-18 09:23

WASHINGTON - From simple home loans to Wall Street's most exotic schemes, the government would impose and enforce sweeping new "rules of the road" for the nation's battered financial system under an overhaul proposed Wednesday by President Barack Obama.

New US financial rules to tighen oversight

US President Barack Obama concludes his remarks on financial regulations in the East Room of the White House in Washington June 17, 2009. [Agencies]

Aimed at preventing a repeat of the worst economic crisis in seven decades, the changes would begin to reverse a determined campaign pressed in the 1980s by President Ronald Reagan to cut back on federal regulations.

Obama's plan, spelled out in an 88-page white paper, would do little to streamline the alphabet soup of agencies that oversee the financial sector. But it calls for fundamental shifts in authority that would eliminate one regulatory agency, create another and both enhance and undercut the authority of the powerful Federal Reserve.

The new agency, a consumer protection office, would specifically take over oversight of mortgages, requiring that lenders give customers the option of "plain vanilla" plans with straightforward and affordable terms. Lenders who repackage loans and sell them to investors as securities would be required to retain 5 percent of the credit risk - a figure some analysts believe is too low.

It also would make the Fed the regulator of some of the largest and most interconnected institutions in the financial world - an attempt to supervise companies that are so big that if they fail they could do harm to the economy. A separate council, chaired by the Treasury secretary, would watch over the financial system to flag risky new products or trends.

In all, the Obama's broad proposal cheered consumer advocates and dismayed the banking industry with its proposed creation of a regulator to protect consumers in all their banking transactions, from mortgages to credit cards. Large insurers protested the administration's decision not to impose a standard, federal regulation on the insurance industry, leaving it to the separate states as at present. Mutual funds succeeded in staying under the jurisdiction of the Securities and Exchange Commission instead of the new consumer protection agency.

Obama cast his proposals as an attempt to find a middle ground between the benefits and excesses of capitalism.

"We are called upon to put in place those reforms that allow our best qualities to flourish - while keeping those worst traits in check," Obama said.

The president's plan lands in the lap of a Congress already preoccupied by historic health care legislation, consideration of a new Supreme Court justice and other major issues. Still, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year's end.

"We'll have it done this year," pledged Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee.

"Absolutely," agreed Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

But fissures quickly developed.

Dodd, who had been at Obama's side in the East Room of the White House for the announcement, raised questions about one of the plan's key features - giving the Federal Reserve authority over huge, intertwined financial institutions.

"There's not a lot of confidence in the Fed at this point," Dodd said.

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