Politico----
President Barack Obama on Wednesday will call for the creation of a Consumer Financial Protection Agency as part of his long-awaited plan for overhauling the nation’s market regulatory structure in response to last year’s meltdown, administration officials tell POLITICO.
The promise to “re-regulate” the wounded Financial system after the go-go years is one of the centerpieces of the president’s agenda, in a year when he’s taking on many of the nation’s most complex problems all at once. Officials call the overhaul by far the biggest since the 1930s.
The new independent agency — which Obama will begin talking up in a series of interviews on Tuesday afternoon — will look after consumers on matters like credit cards, with “a very clear line of accountability around products that they deem abusive of consumers, or misleading,” a senior administration official said.
The consumer agency is one of the proposals in a Treasury Department “white paper” of 85-plus pages that outlines what the White House calls a “comprehensive plan for new rules of the road for the financial industry.”
The plan, to be unveiled by Obama Wednesday, does not ban specific financial products, and officials decided to “harmonize rules” among existing regulators rather than orchestrates a widespread elimination or consolidation of agencies, as they had considered at the outset. The plan eliminates the Office of Thrift Supervision, the weakest of the regulators.
The Federal Reserve will get more power, but there will be no new “super-regulator” like Britain’s Financial Services Authority.
Under a process led by Treasury Secretary Tim Geithner and the White House, administration officials started with a more theoretical approach that one participant called “a pure, design-it-from-scratch system.”
Over months of meetings, the administration team moved toward a proposal that officials say is more practical and limited — and more likely to pass Congress and work effectively.
“We thought we would fight the wars of necessity, not of choice,” the official said.
“The big idea is to fix the problems that originated this crisis — to really go after what was at the core of this problem, which was gaps in regulations, and an approach that was purely focused on different kind of institutions, without anyone looking at the system as a whole.”
Officials discussed banning certain kinds of derivatives, but decided that would be ineffective. “The people in the financial system are, and will continue to be, pretty innovative,” the official said. “They’ll find other ways to accomplish the same things. Even though it might be politically popular, it’s sort of a fool’s errand. You’re better off focusing on the whole structure and the whole system, harmonizing the rules and reducing arbitrage."
Some commentators will argue the plan goes easy on Wall Street. But the financial industry is likely to complain enough to mute such criticisms.
Many of the plans require congressional approval, but some can be accomplished by the administration through executive authority.
The consumer agency will have the ability to set rules and conduct investigations. Administration officials expect that lawmakers will want to have a hand in defining the agency’s mandate, so some flexibility has been left in the plans.
“The idea is to consolidate a lot of these regulators that dabble in the consumer, but it’s sort of a second-tier issue,” the official said.
Administration officials expect the idea will appeal to the left, although it may make conservatives nervous.
Officials considered giving the functions to the Federal Trade Commission. “But they don’t really have banking experience, so we thought it was cleaner to start something afresh,” the official said.
In addition to the creation of the consumer agency, four key elements of the plan are:
-Regulate asset- and mortgage-backed securities. Geithner and White House economic adviser Larry Summers wrote in The Washington Post on Monday that their plan will “impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.”
— Give more power to the Federal Reserve as the primary regulator of big, interconnected firms. The Fed will be able to trigger a “wind-down” of a problem firm. This “workout authority” is a loss for Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, who wanted to take the lead in this area. Instead, she will be one of the regulators. “The view of this team was that if you’re going to have a lead on a complex, big institution, then it ought to be the Fed,” the official said.
-Rename the President’s Working Group on Financial Markets — sometimes referred to as the “Plunge Protection Team,” for its role in financial emergencies — as a council that will advise the Fed, and continue to advise the president and the Treasury. The group will continue to be run out of Treasury. “The idea is to beef that up, make it stronger, give it statutory authority and make it a formal adviser to the systemic risk regulator,” the official said.
— Retain the 50-state regulation system for insurance, rather than create a national regulator. Create a federal Office of Insurance Information (OII) within Treasury, so insurers will have someone to call in a crisis. The idea was introduced by Rep. Paul Kanjorski (D-Pa.).
Some in the White House worry that the urgency for the overhaul has dissipated as the economy has begun showing signs of recovery, and now that Capitol Hill is bogged down with health care and energy legislation. But top officials say it would have been a mistake to rush a shoddy plan up to Congress. And while these officials worry about lawmakers’ workload, they expect to get their framework through after the usual changes of the legislative process.
Administration officials are optimistic that the House Financial Services Committee, chaired by Rep. Barney Frank (D-Mass.) will embrace as many as 90 percent of the ideas. “We’ve taken the time to consult, and the consultative process has surfaced a lot of the things that we think typically would have tripped this stuff up,” an official said.
The Senate will be tougher, and Sen. Chris Dodd (D-Conn.), chairman of the Banking Committee, is overloaded because of reelection worries back home and his role as fill-in chairman of the health committee while Sen. Ted Kennedy (D-Mass.) is away for health reasons.
But administration officials think that once the House moves the legislation, Dodd might be persuaded to follow. And Dodd might realize that because of his political vulnerability, he has an incentive to push the bill.
Sources: Politico, TIME, Washington Times
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