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.
Under the current system, financial firms can choose among four regulators, some of whom receive funding from the companies. This arrangement has spurred agencies to compete for firms' business, sometimes by offering more lenient regulation.
To address this problem, the administration plans to propose a merger of two agencies, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Frank said he also wants the government to remove the incentive for interagency competition by finding alternative financing for the regulators and by preventing firms from picking their regulator. The Fed and the FDIC would continue to oversee some banks.
Under the plan, the Securities and Exchange Commission and Commodity Futures Trading Commission would remain separate, though administration officials have raised concerns in internal discussions that the United States is one of few, if any, countries without a unified regulator for financial markets. Other countries have also expressed concern about regulatory gaps between U.S. agencies.
Geithner decided against proposing the merger after concluding that the existing structure had not contributed to the financial crisis, a source said. If the administration had pressed ahead with a merger, it would have confronted daunting jurisdictional issues on Capitol Hill, where the SEC is overseen by the House Financial Services Committee and Senate Banking Committee, and the House and Senate Agriculture committees oversee the CFTC.
Geithner also is expected to detail the administration's plans for regulating compensation at financial firms. Treasury and SEC officials have discussed requiring companies to disclose compensation not just for senior executives but for the most highly paid employees. The SEC also is planning to propose requiring companies to disclose more information about board meetings to discuss compensation, and details about the types of performance incentives offered to employees.
The Treasury and SEC plan to make an announcement about the issue today, officials said. Geithner offered a preview in testimony before Congress yesterday.
"The SEC has some important responsibilities and obligations" in this area, Geithner said yesterday. He said the agency may seek "additional tools and authorities."
As envisioned earlier, the administration still plans to propose that the government be empowered to dissolve non-bank financial firms that fall into trouble and that a new commission be set up to protect consumers of financial products.
Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said he had urged the administration to approach reform through the question of how best to protect consumers, an approach he described as "bottom up." But Dodd said he was reserving judgment on whether a new commission was the most effective way.
Administration officials are also taking steps to coordinate regulatory reforms with their counterparts in Europe and Canada in hope of keeping problematic activities from migrating to countries with more lenient regulatory regimes.
Geithner, speaking ahead of his departure for meetings Friday and Saturday with Group of Eight finance ministers in Lecce, Italy, dismissed the notion that the United States may be moving slower or with less ambition than its European counterparts, saying financial leaders would seek consensus.
The administration began to craft its reform proposals in February, asking a range of people to describe what had gone wrong. From the outset, President Obama scheduled meetings with congressional leaders, including Dodd and Frank, to solicit opinions. Dodd said he and his staff have been in touch with the administration about regulatory reform on an almost daily basis. Officials also met with former heads of regulatory agencies, academics and industry executives.
Engaging Congress and compromising at an early stage has emerged as a hallmark of the administration's approach on major legislative issues, including the stimulus package and the federal budget. But officials are unlikely to avert conflict on key elements.
House Republican leaders, meanwhile, are trying to develop a consensus within their ranks on a rival proposal for regulatory reform. A draft of the plan provided to The Post argues for curtailing the Fed's power and creating a single federal bank regulator.
Staff writers Anthony Faiola, Brady Dennis and Neil Irwin contributed to this report.