Wall Street isn't buying Obama's reform plan
Pastor Dale Morgan
Wall Street isn't buying Obama's reform plan
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Banks and other firms are quick to attack Obama's consumer-friendly
overhaul of financial rules. The stage is set for a legislative battle,
with Wall Street turning to allies in Congress.
By Walter Hamilton and Jim Puzzanghera
June 18, 2009
Reporting from Washington -- At its core, President Obama's overhaul of
regulations for the financial industry seeks a fundamental change: Make
the federal bureaucracy work for consumers, not just Wall Street. And
Wall Street, not surprisingly, doesn't like it.
Striking a populist tone, Obama complained in a White House speech
Wednesday that average Americans were often baffled by such intricacies
as the terms of credit cards, home loans and other financial products.
That confusion helped fuel the subprime mortgage meltdown that sent the
U.S. and foreign economies reeling.
Much of his reform package involves complex changes to the inner
workings of the financial system, but Obama said that better consumer
protection -- a priority -- was a key to avoiding future financial crises.
Such safeguards could reach far down the line to such everyday matters
as bank overdraft protection. A new agency would have the power to write
federal rules that, for instance, prohibit prepayment penalties on
loans, require better disclosures, order financial companies to offer
easily understood options, and levy fines and penalties for lenders that
don't comply.
"The most unfair practices will be banned," Obama said. "Those
ridiculous contracts with pages of fine print that no one can figure
out, those things will be a thing of the past. And enforcement will be
the rule, not the exception."
Consumer groups hailed the plan.
"This is a dramatic shift in the focus of financial regulation, which
should lead to a credit marketplace which is easier for consumers to
understand and safer," said Travis Plunkett, legislative director for
the Consumer Federation of America.
But banks and other Wall Street firms that earn billions of dollars on
consumer financial products quickly attacked the proposal, setting the
stage for what is likely to be a hard-fought legislative battle.
"We intend to take our case to Congress to explain why we believe adding
new layers to a broken regulatory system is not the answer," said David
Hirschmann, president of the Center for Capital Markets at the U.S.
Chamber of Commerce.
The emphasis on consumer safeguards is part of the blueprint Obama
unveiled formally Wednesday for the most dramatic changes in financial
rules since the Great Depression.
It calls for tough new requirements on companies whose failure would
threaten the economy, new oversight of complex financial derivatives and
stepped-up rules for hedge funds and private equity firms.
One of its most controversial provisions is the creation of an
independent Consumer Financial Protection Agency, which would assume the
watchdog duties now spread across several regulatory agencies and that
administration officials say are often ignored.
"It is an indisputable fact that one of the most significant
contributors to our economic downturn was an unraveling of major
financial institutions and the lack of adequate regulatory structures to
prevent abuse and excess," Obama said.
Oversight gaps
Consumer protection now is fragmented, creating major gaps in oversight
and inattention to those issues by regulators who "see the world through
the lenses of institutions and markets, not consumers," according to the
administration's 85-page regulatory reform plan.
The plan noted that federal regulators waited until December 2005 to
propose warnings for consumers about subprime mortgages, which are home
loans made to borrowers with little or no credit or bad credit.
The proposal, though, wasn't made final until June 2007, well past the
time when the worst of those loans were written. One of the powers of
the new consumer protection agency would be to set new rules for home
lending, "so that the bad practices that led to the home mortgage crisis
will be stamped out," Obama said.
The agency's reach could have a palpable effect on the everyday
financial lives of millions of Americans, experts said, potentially
extending to products such as car loans and even gift cards.
"Even the most financially astute" consumers can have trouble
deciphering increasingly complex financial products, the administration
said. The plan would require "clear and conspicuous" disclosure of costs
and risks.
The administration has made passage of the regulatory reform plan a
priority and tried to roll it out as quickly as possible, hoping
Congress could pass it this year. But supporters are concerned that the
issue has lost momentum as the economy has shown signs of improvement.
Treasury Secretary Timothy F. Geithner begins the sales job on Capital
Hill today with testimony at House and Senate hearings. Key lawmakers
said they would work with the administration on the reforms.
Congressional committees are likely to make many changes.
Democrats appear to support the effort to increase consumer protection,
but agencies losing those powers, along with business lobbyists, are
expected to fight the creation of the new watchdog agency. Many
Republicans and Democrats also balk at increasing the power of the
Federal Reserve, which they said failed to identify the warning signs of
the deep recession.
Consumer advocates hailed Obama's proposal and the new watchdog agency
as a wholesale shift in federal policy.
"This will be a go-to agency for Joe and Jane Consumer on the street,"
said Ed Mierzwinski, consumer program director at the U.S. Public
Interest Research Group. "When they have a problem, they'll be able to
call this agency."
More bureaucracy?
But business groups said such an agency would exacerbate the bureaucracy
that consumer groups and others agree has hamstrung regulation over the
years.
"You'll have much more effective consumer protection if you make current
regulators stronger and much more effective at consumer protection than
if you bifurcate the system and put consumer protection in a different
place," Hirschmann said.
In addition, banks could get mixed signals if directives from the
consumer agency conflict with those of another regulator that is
concerned with an institution's safety and soundness, said Steve
Bartlett, chief executive of the Financial Services Roundtable, a trade
group.
For example, a consumer agency could oppose high interest rates charged
on loans while another regulator could favor them as a way to improve an
institution's financial stability, Bartlett said.
"The consumer protection agency is probably our largest concern at this
point," he said.
But Plunkett of the Consumer Federation said banking regulators had
dismissed consumer interests as running counter to the primary goal of
preserving the safety and soundness of the institutions.
"Regulators often acted like if they restricted a particular financial
institution in any way from offering any kind of financial product, it
might negatively affect the bottom line . . . that was the culture," he
said. "We need an agency with a different mind-set and a different culture."
Business interests are likely to find a sympathetic ear among Republican
lawmakers, who were critical of the plan for increasing government
involvement in the marketplace.
"The American people don't want Washington to get more involved in the
private sector; they want an exit strategy to get Washington out of the
bailout business," House Minority Leader John A. Boehner (R-Ohio) said.
The agencies that now share consumer responsibilities also are expected
to fight against the loss of their power. Indeed, the Securities and
Exchange Commission appears to have won a turf battle by preserving its
oversight of mutual funds, one of the most popular consumer financial
products.