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Goals Shift For Reform Of Financial Regulation

Treasury chief Timothy Geithner with Sen. Susan Collins (R-Maine) yesterday. Geithner, who is headed to Italy to meet with the Group of Eight finance ministers, says they will seek consensus to move on quickly with regulatory reform.
Treasury chief Timothy Geithner with Sen. Susan Collins (R-Maine) yesterday. Geithner, who is headed to Italy to meet with the Group of Eight finance ministers, says they will seek consensus to move on quickly with regulatory reform. (By Jay Mallin -- Bloomberg News)

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By David Cho, Binyamin Appelbaum and Zachary A. Goldfarb
Washington Post Staff Writers
Wednesday, June 10, 2009

The Obama administration is pulling back from some of its most ambitious ideas for overhauling the financial system, after determining that the consolidation of power under fewer federal agencies would face grave opposition by lawmakers and regulators, sources familiar with the discussions said.

Although the unveiling of the plan is a week away, several central elements have already been pummeled in public by lawmakers, wary of the concentration of authority in few hands, and in private by some economists and financial executives consulted by senior officials.

The administration had originally sought to eliminate turf wars among agencies and gaps in their oversight, for instance by centralizing the power to oversee banks in one body and combining the two agencies that police financial markets.

Those proposals have fallen by the wayside, the sources said. Instead the administration increasingly is focused on adding new layers of regulation on top of old. Officials are planning to empower the Federal Reserve with new powers to manage risk across the financial markets, but are considering setting up a council of regulators to keep the central bank in check.

The plan's evolution reflects the administration's revised judgment that some changes, while desirable, do not get at the causes of the financial crisis, while other elements, such as the elimination of entire agencies, would be rejected on Capitol Hill. What remains, however, would still be the most sweeping overhaul of financial regulation since the Great Depression.

The administration's proposal reflects its wide range of consultations, which may improve the chances that significant reforms will pass Congress. But as a result, the plan increasingly diverges in key respects from what senior administration officials say is the ideal approach to improving financial regulation.

The plan now taking form would include the creation of a council to work with the Fed to coordinate oversight of the financial system, according to testimony by Treasury Secretary Timothy F. Geithner at congressional hearing yesterday.

The scaling back of the administration's plan was reported in yesterday's Wall Street Journal. New details emerged yesterday.

The proposal for a council is a response to concerns on Capitol Hill that the Fed would otherwise have too much power. But it remains unclear how it would interact with the central bank and whether the new body would be an effective check on the Fed's power.

Rep. Barney Frank (D-Mass.), House Financial Services Committee chairman, said that the council would be responsible for identifying unregulated firms and financial markets and assigning jurisdiction over them to a regulator.

The body, according to Federal Deposit Insurance Corp. Chairman Sheila C. Bair, would "get us all working together." She added that it would create a system of "checks and balances" and that such a collection of regulators with the authority to oversee systemic risk "is going to be an entity that's got a lot of power."

The administration has also moved away from a plan favored by experts to create a single agency to oversee the banking industry.


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