Obama's Financial Regulatory Plan Comes Under Attack
Thursday, July 16, 2009
Key elements of the Obama administration's regulatory reform plan came under attack again yesterday, with bankers criticizing proposals meant to protect consumers and two former top securities regulators opposing plans to make the Federal Reserve the overseer of broader risks to the financial system.
The representatives from the banking and mortgage industry argued that the agency -- which would have broad powers to guard consumers from abusive lending practices by overseeing mortgages, credit cards and other financial products -- could cause more harm than good.
They said that creating a new federal bureaucracy would further complicate an already convoluted regulatory system. It would increase costs to consumers, they said, stifle financial innovation and leave customers with fewer choices in credit products. They also claim that consumer-protection issues are inextricably linked to an institution's "safety and soundness," and that dividing oversight of those roles between regulators could be ruinous.
Separately, in New York, an investors group led by former Securities and Exchange Commission chairmen William Donaldson and Arthur Levitt broke with the administration, saying that a small, independent board, not the Fed, should oversee risks that large and complex financial institutions and products pose to the broader financial system.
"We're proposing what we think will be superior" to the Obama plan, Donaldson said in an interview. "To involve the Federal Reserve has the potential to compromise its main mission" to implement monetary policy, he said.
The investor group is seeking to find a middle ground between the Obama administration, which wants the Fed to be the single regulator overseeing the health of the financial system, and the "college of cardinals" model advocated by some lawmakers and heads of regulatory agencies.
Of the two, the administration's approach has more serious drawbacks, the group said in a report released yesterday.
The Fed's "credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance-sheet leverage and amass huge concentrations of risky, complex securitized products," the group said. "Other serious concerns stem from the Fed's regulatory failures -- its refusal to police mortgage underwriting or to impose suitability standards on mortgage lenders -- and the heavy influence that banks have on the Fed's governance."
Fed officials declined to comment.
The investor group was formed in February with the stated goal to give investors a voice in the debate on regulatory reform. Its 18 members include Bill Miller, chief investment officer of Legg Mason Capital Management; Barbara Roper, a director at the Consumer Federation of America; and Joe Dear, the investment chief of the California public employees' pension fund.
Levitt, a Democrat, was head of the SEC from 1993 to 2001. He is an adviser to the District-based private-equity firm Carlyle Group. Donaldson was a Republican SEC chairman under President George W. Bush.
The investor group said that its financial oversight board would consist of a chair and no more than four full-time members and that all should be presidential appointees confirmed by the U.S. Senate.