Obama may compromise on consumer agency to pass financial regulation

By David Cho and Brady Dennis
Washington Post Staff Writer
Thursday, February 25, 2010

The Obama administration is no longer insisting on the creation of a stand-alone consumer protection agency as a central element of the plan to remake regulation of the financial system.

In hopes of quick congressional approval of a reform bill, White House officials are opening the door to compromise with lawmakers concerned about creating a new bureaucracy, according to congressional and some administration sources.

President Obama's economic team is now open to housing the consumer regulator inside another agency, such as the Treasury Department, though they still prefer a stand-alone agency. In either case, they are insisting on a regulator with political autonomy and real teeth so it can effectively enforce rules designed to protect consumers of mortgages, credit cards and other financial products.

The administration may also have to compromise on Obama's recent proposal for a rule to limit risky activities at banks by prohibiting them from engaging in many kinds of speculative investments.

Treasury officials are preparing to send Capitol Hill a toughly worded measure that would bar banks from making certain investments that benefit only the firms' bottom line rather than their customers. But there is little support among either Democratic or Republican lawmakers for this proposal, known as the "Volcker rule," and Senate leaders are now closing ranks around legislation that would leave it to banking regulators, rather than the law, to decide which activities to ban.

From the start of the Obama presidency, administration officials have made far-reaching financial reform one of their highest priorities, along with overhauling the nation's health-care system. Officials have vowed to put in place new rules and regulators to prevent a repeat of the abuses that precipitated the financial crisis.

Even as the administration is showing new flexibility, some senior executives in the financial industry have also been coming around, easing some of their intensive lobbying against the regulatory overhaul. Instead of trying to block the proposals for a consumer protection agency and curbs on risky investment practices, these executives are working more closely with Democrats to secure a deal the banks can live with.

After the White House escalated its attacks on Wall Street earlier this year, some executives concluded that the swift passage of a regulatory reform bill would be in their best interest because it would move them out of the political cross hairs, industry officials said. The adoption of a new bill would also resolve much of the uncertainty about the rules to govern the financial industry, allowing companies to make business decisions with more confidence.

According to some industry officials, Wall Street executives also sense that they now have a better chance for a relatively favorable bill because the administration is in a hurry to record a major legislative achievement before congressional elections in November. At the same time, some financial lobbyists said they were afraid the administration would unilaterally impose strict new measures on the industry if Congress could not come up with a bill.

The new momentum has raised hopes within the administration that a bill could be signed before the elections. But the path is still not clear. Administration officials and Democratic leaders have been seeking to win support from Republicans, who could filibuster the bill, without alienating liberals insisting on a new consumer protection agency and tough restraints on Wall Street activities.

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), who is shepherding the effort in the Senate, said Wednesday evening that there is still no final agreement between Democrats and Republicans, and aides said that many vital details remain unresolved.

"Dodd is willing to be flexible, but there's a limit to that flexibility," said one Senate aide, who spoke on the condition of anonymity because talks are ongoing. "Both sides are going to have to learn to live with things that aren't exactly how they would have written it."

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