Obama Blueprint Deepens Federal Role in Markets
Plan to Overhaul Financial Regulation Focuses on Consumer Protection, Risk
Wednesday, June 17, 2009
The Obama administration last night detailed a series of proposals to involve the government more deeply in private markets, from helping to steer borrowers into affordable mortgage loans to imposing new limits on the largest financial companies, in a sweeping effort to curb the kinds of reckless risk-taking that sparked the economic crisis.
The plan seeks to overhaul the nation's outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building.
The White House makes its case for this approach in an 85-page white paper that describes the roots of the crisis. Gaps in regulation allowed companies to make loans many borrowers could not afford. Funding came from new kinds of investments that were poorly understood by regulators. Big firms paid employees massive bonuses, while setting aside little money to absorb potential losses.
"While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system," the white paper says.
The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.
The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.
It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.
Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.
The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.
And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.
President Obama is scheduled to announce the full plan today, ending months of political calibration and internal discussion and dropping the details into an already-heated debate on Capitol Hill. Congress is scheduled to hold its first hearings on the proposals tomorrow, and interest groups already are ramping up their campaigns. Congressional leaders say they hope to pass some version of the plan by year's end.
"Speed is important," Obama said yesterday in an interview aired by CNBC. "We want to do it right. We want to do it carefully. But we don't want to tilt at windmills. We want to make sure that we're getting the best possible regulatory framework in place so that we're not repeating the mistakes of the past."