Obama Defends Financial Overhaul
Fault Lines Emerge as Industry Groups Blast Plan to Create Consumer Agency

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, June 18, 2009

President Obama introduced his plan to reform financial regulations yesterday as a key to reviving the economy, setting up an intense battle over the particulars that is likely to rage on Capitol Hill for the rest of the year.

Legislators, regulators and advocates all welcomed the idea of change, but industry groups already are arguing that elements of the plan will hurt consumers or the broader economy, not to mention financial firms.

Opposition is piling up with particular speed against the idea of a new agency with broad powers to protect borrowers and other customers of financial firms, setting up a high-stakes contest between the industry and the White House for the loyalty of a few moderate senators who increasingly hold the balance of power.

The president used his bully pulpit yesterday to argue that the government must intervene against a "culture of irresponsibility" that encompasses banks and borrowers, becoming more involved in the markets to create a basis for sustainable growth. In addition to a consumer protection agency, he proposed new powers for the Federal Reserve to regulate large firms and critical markets, and urged a series of smaller federal interventions.

"Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and the failure of their government to provide adequate oversight," Obama said. "Our entire economy has been undermined by that failure."

The administration's plan, presented in an 85-page "white paper" with a green cover, is the product of months of debate with a wide range of legislators, experts and interest groups. Senior officials tried to assess the causes of the crisis, consider the best policy responses and then push those ideas through the filter of political viability. The result is a sweeping plan that combines a few overarching proposals with dozens of small tweaks to the system.

Implementing the entire plan would require scores of separate actions, including new laws, rewritten rules and international coordination.

The two congressmen most responsible for the next stage in the process walked side-by-side from the White House yesterday afternoon, carrying the debate to the other end of Pennsylvania Avenue and vowing to return with a final bill by the end of the year.

Rep. Barney Frank (D-Mass.) and Sen. Christopher J. Dodd (D-Conn.), whose committees will hammer out most of the details, were invited by the White House to sit alongside the president's senior advisers during the speech. Afterward they expressed broad agreement with the principles but said that many of the specific proposals needed to discussed and modified, and that some were unlikely to survive.

Still, Frank said as Dodd nodded, "This will be on the president's desk before we adjourn for the year."

The president's speech came on the same day that several large financial firms repaid federal aid, underscoring the administration's transition from fighting a financial crisis to addressing its causes. Nine banks said yesterday that they had repaid a total of $66 billion, including J.P. Morgan Chase, which wired the government $25 billion, and Capital One Financial of McLean, which repaid $3.6 billion.

Regulators had approved the repayments last week after concluding that the strongest large banks no longer needed the aid.

"My administration has mounted an extraordinary response to an historic economic crisis," Obama said yesterday. "But even as we take decisive action to repair the damage to our economy, we are working hard to build a new foundation for sustained and lasting economic growth."

The proposed Consumer Finance Protection Agency is built on the ideas of Elizabeth Warren, the Harvard Law professor who chairs the congressional panel overseeing the Treasury Department's financial rescue program. Warren, who attended the president's speech, said afterward that the administration had proposed a "muscular" version of her concept.

"This agency is not about saving people from themselves or limiting choices," Warren said. "It is about giving people the tools to make good choices."

Consumer groups have long sought increased enforcement of consumer protection laws. They have been invigorated in recent months by the carnage of the financial crisis and by clear signs that they have the president's ear. But they still face the formidable opposition of trade groups such as the American Bankers Association, which represents thousands of banks owned by tens of thousands of community leaders, and which immediately blasted the proposal.

"The inclusion of the highly controversial Consumer Financial Protection Agency will undermine chances of enactment of needed reform," said Ed Yingling, the association's president.

There are much more complicated fault lines around the other major proposal, to give the Fed new authority and responsibility for overseeing the financial industry.

The idea is broadly favored by the largest financial firms, which see the Fed as a sophisticated regulator that shares their basic concern for the health of financial markets. The largest banks also welcome the inclusion of other kinds of large financial firms such as insurance companies and investment banks under the same set of rules, eliminating the competitive advantages those firms have enjoyed.

But the issue has divided congressional Democrats. Many in Congress think the Fed has failed in its current responsibilities, which include protecting consumers and regulating large banks such as collapsed Wachovia, tottering Citigroup and troubled Bank of America.

"They haven't exactly inspired a lot of confidence," Dodd said.

To placate those critics, the administration proposed a council of other regulators to advise the Fed. But senior administration officials have not budged from their basic belief that a single agency should have undivided power over the largest firms and critical markets, and they say that the Fed is the best candidate for that role.

"I do not believe there is a plausible alternative that will create the necessary degree of confidence, accountability, responsibility, authority for protecting us against some of the risks we faced in this crisis," Treasury Secretary Timothy F. Geithner said yesterday in a briefing with reporters.

A revolt against that conclusion already is brewing. Sen. Mark Warner (D-Va.), who sits on the banking committee, said in a speech on the Senate floor yesterday that he favored creating a council of regulators with shared responsibility for systemic risk.

"We have resisted creating an all-powerful central bank to this point, and the experiences of countries which have concentrated too much power in one entity serve as cautionary tales," Warner said. "A systemic risk council is not a silver bullet, but it avoids the pitfalls of entrusting systemic risk responsibility with one agency."

Many Republicans also are opposed to expanding the Fed's power, in part because they fear it will corrupt the central bank's basic mission to regulate economic growth, and in part because they think the Obama plan needlessly imposes new layers of oversight on the markets.

"The problem was dumb regulation and the failure to enforce properly and intelligently the regulations that we already had on the books," said Rep. Jeb Hensarling (Tex.), a leading Republican voice on financial issues. He and others in his party have advocated for a new agency to regulate all banks.

Dodd and Frank said yesterday that their committees would explore alternatives to increasing the Fed's power.

Staff writer Neil Irwin contributed to this report.

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