By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, June 9, 2009
As the Obama administration prepares to unveil plans for overhauling financial regulation, potentially addressing such diverse issues as credit card lending and global economic threats, a multifront war is brewing. It pits competing interests among businesses, consumers, government agencies and lawmakers against one another.
The outcome of this battle is likely to shape how much profit banks will make, who can get a mortgage, which federal regulators oversee different corners of the economy -- and, ideally, whether the government is prepared for future financial threats.
With so much money and power on the line, interests inside the government and out are not waiting for the administration to reveal its plan, which sources say will be detailed next week. Lobbyists for financial firms and consumer activists, among others, have been meeting privately with the Treasury Department and the White House to press their views, according to people briefed on the discussions.
These early efforts are exposing the fault lines that will define the debate over the future of financial regulation. Yet the coalitions are fluid, with allies on one issue often at odds about others.
-- Financial firms, for instance, have closed ranks in vigorously opposing a proposal for how mortgage lending, credit cards and mutual funds will be regulated.
-- Big banks are squaring off against smaller ones over proposals for consolidating regulatory powers in a few agencies.
-- Banks and hedge funds find themselves on opposite sides in the debate over how to regulate the trading of derivatives, an exotic financial instrument that aggravated the financial crisis.
-- And government agencies, jealous of one another's existing powers and prestige, are also clashing over plans to redistribute their authority.
The struggle over these regulatory issues could dominate Washington debate in the coming months, much as the bailout of financial companies has done since last fall. Though the administration will put forward a proposal, the ultimate shape of the new regulatory framework will be the result of much deliberation on Capitol Hill.
"It's going to be very intense. It's going to be feverish. You'll see extremely important issues being debated that have major financial implications for companies, for shareholders and obviously for the country," said Tim Ryan, chief executive of the Securities Industry and Financial Markets Association.Big vs. Little
Big financial firms, including the nation's largest banks, are mostly supportive of the administration's aim to concentrate regulatory power in as few agencies as possible. But smaller banks and other financial firms do not want to lose their traditional regulators and, along with these agencies themselves, are resisting consolidation.
Among the proposals dividing big from small is a plan to make the Federal Reserve into a systemic risk regulator, which would give it the power to peer into any market or business and take action to reduce threats to the financial system.
Large banks and small banks are both regulated by the Fed and other agencies. But big banks have deep relationships with the Federal Reserve Bank of New York, long the government's main liaison with the nation's largest financial institutions. Smaller firms enjoy more established relationships with other federal regulators, such as the Office of Thrift Supervision, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., as well as with state-level bank supervisors.
In the creation of a systemic risk regulator, small banks want their regulators to have a seat at the table. As a result, they favor the creation of a council of leading regulators.
The relationship between banks and their regulators is often symbiotic. Regulators depend on banks for funding. Banks look to regulators as judge and advocate who sign off on business decisions and then defend them to other regulators. They also believe that regulators, in particular the FDIC and state supervisors, are in the best position to advance their interests locally. Regulators are measured, in large part, by the performance of the banks they oversee.
The differences between big and smaller banks are mirrored in the federal government itself. Treasury Secretary Timothy F. Geithner, a former president of the New York Fed, advocates naming the Federal Reserve as systemic risk regulator. But the other federal and state bank regulators fear the Fed could trump their powers. So these other agencies, like the smaller banks they oversee, have come out for the council of regulators.
Similar alliances have also formed on either side of another proposal that would eliminate much, if not all of the patchwork of agencies now responsible for supervising banks and consolidate most of the authority in a single regulator. This agency might also oversee insurance companies.
For most of the current regulators, this dramatic restructuring would cost them money, personnel and prestige -- if they survived at all. State officials, meanwhile, would fight any federal laws that trump state regulation of banks and insurance companies, which are currently regulated solely by states. Under current law, banks may choose between obtaining a federal charter or a state charter to operate.Business vs. Consumer
A separate battle is unfolding over a proposal to strip various agencies of the powers to regulate mortgage lending, credit cards and mutual funds and hand this authority to a new regulator focused on consumer financial products.
Supporters of this idea, which has strong advocates in the administration, include consumer activist groups, labor unions, community organizers and many prominent Democrats. They argue that it would protect consumers from financial products that ultimately aren't in their interests. That could mean that banks would have to take more steps to ensure that a mortgage is suitable for a particular home buyer or be prohibited from charging excessive fees to people who fail to pay their credit card bills on time. Fewer people would get caught off guard by unexpected fees or high interest rates. Also under discussion by the administration is whether to bring some consumer investment products, such as mutual funds or annuities, under this agency.
"In theory, one could argue that good prudential regulation begins with good consumer protection regulation, but that doesn't seem to be the history," said Travis Plunkett, legislative director for the Consumer Federation of America. "We need a single agency whose sole mission is to protect consumers so there's no chance consumer protection will become an afterthought ever again."
But financial firms worry that such a commission would severely limit the kinds of loans they can make and the interest rates and fees they can charge. That, in turn, would curb profits. Industry officials say such a commission would not have enough information about financial firms to make sound decisions about whether to limit the sale of financial products.
"The system is weakened when you separate regulation of the institution and the product. Each regulator would only have half the necessary information," said Scott Talbott, a top official with the Financial Services Roundtable, a major financial lobby.
The idea has also engendered strong opposition from government agencies that stand to lose their current oversight role, arguing they are the ones best suited for the task.Congress vs. Congress
On Capitol Hill, a showdown looms over the possibility of merging the Securities and Exchange Commission with its sister agency, the Commodity Futures Trading Commission. SEC Chairman Mary L. Schapiro and CFTC Chairman Gary Gensler have both signaled an openness to combining the agencies, though the Obama administration has backed away from the idea, according to people familiar with the discussions. Officials who advocate a merger say the markets regulated by the two agencies have become interconnected, requiring more coherent oversight. Supporters also say that a merged agency might do a better job policing money managers and investment products for Ponzi schemes and other frauds that victimize ordinary investors.
But the two bodies are overseen by different committees, and their members, regardless of party affiliation, are determined to protect their influence and ties to industry.
The CFTC has long come under the jurisdiction of the House and Senate agriculture committees because of its origins as the primary regulator for commodities futures, for instance those for wheat and soybeans. Over time, the exchanges where these futures are traded and the companies trading them -- largely based in the Midwest -- have become political and financial supporters for members of the agriculture committees. These lawmakers often come from farm states, where commodities policies have a strong impact.
By contrast, the House Financial Services Committee and Senate Banking Committee have jurisdiction over the SEC. These committees have more members from urban states that are often home to large financial firms.
In recent years, futures markets have gravitated beyond traditional commodities into various types of financial instruments, such as credit-default swaps and currency futures. These kind of investment activities are, in some ways, related to business practices already regulated by the SEC and its congressional overseers.
A merger of the SEC and CFTC could transfer power over both agencies to the financial services and banking committees at the expense of the agriculture committees.
But even amid heightened discussion of such a merger, rival committees have been pursuing their own courses, holding parallel hearings on derivatives. Early this year, Rep. Barney Frank (D-Mass.), chairman of House Financial Services Committee, suggested that the CFTC regulate only "edible" derivatives, angering members of the House Agriculture Committee.Money Managers vs. Banks
A related proposal to oversee financial derivatives -- perhaps by this new, combined regulator -- is splitting the financial industry between those who stand to make money from tighter restrictions and those who stand to lose.
All financial firms agree that derivatives will face tighter regulation. But there are different ways to do this. If derivatives were traded on heavily regulated, high-volume exchanges, it would be easier and safer for hedge funds, brokers and investors because they would be assured that the prices they pay are competitive and their business partners are legitimate.
This setup could cut into the profits of banks, however. They now serve as the intermediaries for much of this trading and their role would diminish for those derivatives traded on an exchange. So banks tend to oppose this requirement, instead preferring that trades be settled using a more lightly regulated clearinghouse.