President Barack Obama - 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 at the White House, Obama detailed the reform
proposals the administration says are necessary to avoid another
financial crisis. He 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."
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." But two Democratic lawmakers pivotal to the effort
predicted Wednesday that reform would be accomplished by year
end.
"We'll have it done this year, before we leave," Senate Banking
Committee Chairman Christopher Dodd, D-Conn., told reporters
outside the White House.
House Financial Services Committee Chairman Barney Frank,
D-Mass., said his panel would mark up "several" pieces of
legislation in July, including bills on executive compensation,
consumer financial product safety, and the regulation of
derivatives. He said the package of legislation would come together
in September.
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."
Other members of the GOP echoed that sentiment.
"President Obama's plan is too predictable," said Republican
National Committee Chairman Michael Steele. "Enough is enough."
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.
The U.S. Chamber of Commerce said Obama's plan adds unnecessary
layers of regulation without properly reforming the current system.
"We can't simply insert new regulatory agencies and hope that we've
covered our bases," said David Hirschmann, president and CEO of the
Chamber's Center for Capital Markets.
House Minority Leader John Boehner, R-Ohio, said the new agency
would be "very cumbersome."
"It will limit the number of new financial products that will
come to the market and will give the federal government a strong
presence in an industry that has been creative," Boehner said
Wednesday.
The Consumers Union applauded the proposal to create an agency
devoted to safeguarding consumers from shady financial
practices.
"We have laws to make sure that cars are safe, toys are safe,
and medicines are safe," said Gail Hillebrand, director of
Consumers Union's campaign for financial services reform. "But when
it comes to financial products like mortgages and credit cards,
consumers don't have the protections we need."
-By Henry J. Pulizzi, Dow Jones Newswires; 202-862-9256;
henry.pulizzi@dowjones.com