Treasury Plans Under Fire
DON'T LOOK now, but another one of the Obama administration's signature reform efforts is running into trouble. It's not health care this time, but the also important financial regulatory overhaul that Treasury Secretary Timothy F. Geithner unveiled in June. President Obama has argued that there could be a repeat of last year's financial panic some day unless the existing patchwork of financial oversight agencies is modernized. The question more and more people are asking, though, is whether his plan will get the job done.
Wary of taking on deeply entrenched bureaucracies, Mr. Obama opted for a proposal that left in place all eight regulatory bodies but one (the Office of Thrift Supervision, which covers federally chartered savings and loans). This went against the recommendations of many who felt that consolidating the agencies would eliminate the regulatory forum-shopping that had enabled some of Wall Street's riskiest practices. The administration concluded it was more realistic politically, and sufficient in policy terms, to realign responsibilities among the agencies, while adding two new bodies, one for financial consumer protection and one to monitor systemic risks.
Sen. Mark R. Warner (D-Va.) has come out against the administration plan in favor of what he says is a necessarily bolder one that would assign to a single new agency the banking regulation functions that are currently spread among the OTS, the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency. Meanwhile, the heads of some of these same agencies have trooped to Capitol Hill to complain that the proposed consumer agency would usurp functions that should belong to them.
A key point of contention is the administration's insistence that the consumer agency have not only rule-making power for the entire financial system but also enforcement and examination authority. This offends community banks, which make up a powerful lobby. They argue that they were innocent of the riskiest subprime mortgage lending and securitization that helped bring on the crisis, so they should remain under the aegis of traditional bank regulators -- while the consumer agency supervises mortgage brokers and other parts of the "non-bank" financial sector. Both the FDIC and the OCC have publicly agreed.
This was directly counter to the Obama administration's position that the consumer agency should police a "level playing field." Small wonder that Mr. Geithner recently unloaded on the regulators behind closed doors. Insofar as he was trying to jar these regulators out of their traditional turf-conscious mentality, he had a point. But it's also true that, by positioning itself in the cautious middle, the administration opened itself to attacks from all sides.