UPDATE: Obama: Regulatory Reform Plan Seeks 'Careful Balance'
June 17 2009 - 12:47PM
Dow Jones News
President Barack Obama, officially kicking off a drive to
rewrite the playbook guiding U.S. financial institutions, markets,
and consumers, said his plan seeks a "careful balance" that doesn't
stifle the power of the free market.
In remarks prepared for delivery later Wednesday, Obama detailed
the reform proposals the White House says are necessary to avoid
another financial crisis. Obama confirmed that the overhaul, which
he wants to complete this year, includes giving more power to the
Federal Reserve to police large, systematically important
institutions, allowing the government to break firms apart,
implementing new rules for complex instruments and creating a new
federal agency to oversee consumer products such as mortgages and
credit cards.
"With the reforms we are proposing today, we seek to put in
place rules that will allow our markets to promote innovation while
discouraging abuse," Obama said. "We seek to create a framework in
which markets can function freely and fairly, without the fragility
in which normal business cycles bring the risk of financial
collapse; a system that works for businesses and consumers."
The White House released a copy of the president's remarks,
which he will deliver at 12:50 p.m. EDT.
Obama, whose economic team has been crafting the overhaul for
months, said inadequate regulations, coupled with a vast culture of
greed and an explosion of complicated financial instruments,
induced excessive risk taking and helped trigger the economic
crisis. The remedy, he said, is a "sweeping overhaul of the
financial regulatory system" on a scale that hasn't been seen since
the Great Depression.
Obama said large financial companies will be held to higher
standards, with more stringent capital and liquidity requirements
to boost their resiliency. The Fed's new authority will be
complemented by an oversight council of regulators to "tackle
issues that don't fit neatly in an organizational chart."
To close gaps in regulation and keep banks from seeking the
lightest-possible agency regulator, Obama confirmed that the Office
of Thrift Supervision will be dismantled and said only one federal
banking charter will be offered. He said derivative instruments
such as credit default swaps will be subject to greater regulation
and hedge-fund advisers will be forced to register with the
Securities and Exchange Commission.
"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. "We are called upon to recognize that the free
market is the most powerful generative force for our prosperity -
but it is not a free license to ignore the consequences of our
actions."
But moving his plans through Congress as they are currently
written is far from assured, given turf battles among lawmakers and
what is sure to be heavy resistance from the financial sector. The
Bush administration's attempt to rewrite the rules of financial
regulation, which also would have heightened the Fed's supervisory
powers, never got off the ground, despite a push last year by
then-Treasury Secretary Henry Paulson.
And Obama acknowledged earlier this week that his revamp will be
"a heavy lift."
Criticism of the plan intensified as details emerged late
Tuesday and early Wednesday, with critics accusing Obama of an
expensive overreach.
"We don't necessarily need more regulation," House Republican
Whip Eric Cantor, R-Va., told the CBS Early Show. "And, in fact, I
believe that we've had much too much emphasis on government lately
and not as much emphasis on people."
Obama addressed critics who say his revamp goes too far, as well
as those who complain it doesn't go far enough.
He said it would be a "mistake" to scrap the old system
entirely, opting instead to "pinpoint the structural weaknesses"
behind the current crisis. At the same time, he said "significant
changes" are still needed.
"The absence of a working regulatory regime over many parts of
the financial system - and over the system as a whole - led us to
near catastrophe," he said. "We do not want to stifle innovation.
But I'm convinced that, by setting out clear rules of the road and
ensuring transparency and fair dealings, we will actually promote a
more vibrant market."
Other reaction foreshadowed the long battle ahead.
The Financial Services Roundtable said it backs many of the
White House's ideas, including creation of a systemic risk
oversight authority, but opposes the new Consumer Financial
Protection Agency.
Mark Calabria, director of financial regulation studies at the
libertarian Cato Institute, criticized the proposed overhaul for
focusing on "convenient targets" rather than "real flaws" in the
current structure, such as the cost to taxpayers of Fannie Mae
(FNM) and Freddie Mac (FRE).
Calabria called Obama's plans "a misguided, ill-informed remake
of our financial regulatory system that will likely increase the
frequency and severity of future financial crises."
-By Henry J. Pulizzi, Dow Jones Newswires; 202-862-9256;
henry.pulizzi@dowjones.com