Is Obama ditching his challenge to Wall St?

Business Times - 16 Jun 2009

Is Obama ditching his challenge to Wall St?

He and his aides may be embracing a more gentle approach to financial system reforms


AGAINST the backdrop of economic crisis and Washington's decision to bail out some of Wall Street's leading financial institutions earlier this year, there were expectations that the Obama administration would respond to rising populist sentiments with ambitious proposals to enforce tough federal government regulations on the financial system.

Some even thought that this would include direct intervention in corporate pay decisions and the creation of a powerful government regulatory agency.

President Barack Obama is expected to announce this week his plan to overhaul regulation of America's chaotic financial system. The conventional wisdom in Washington and Wall Street now is that the administration and Congress will probably adopt measures that would allow the government to liquidate troubled financial institutions.

But the administration is not likely to launch a Big Bang-type transformation of Wall Street. It will instead embrace a series of less dramatic steps to prevent future financial panics and protect the interests of consumers purchasing financial products.

Mr Obama, a Harvard graduate whose political and financial backers included leading investment bankers, has never been considered to be a traditional populist. However, as a presidential candidate during the height of the financial crisis, he did challenge the status quo in Wall Street and called for a major reform of the financial system.

Indeed, during the presidential campaign Mr Obama proposed, among other things, that non-bank mortgage brokers and companies be regulated like banks, that overlapping and competing regulatory agencies be streamlined and that a financial market oversight commission, to identify and monitor threats and risks to the financial system, be created.

After taking office, President Obama seemed to suggest that excessive compensation in the private sector contributed to the financial crisis and that the government needed to do something about it. He made that argument after disclosures that AIG, the insurance giant, had paid bonuses of US$165 million even as it accepted billions from the government.

The reports ignited huge public anger and led Congress to approve legislation restricting such compensation in companies benefiting from government bailouts.

Now a sense that the financial meltdown may be over and strong opposition from Washington lobbies that represent the financial sector and enjoy support on Capitol Hill have forced Mr Obama and his aides to step back from their more ambitious ideas and embrace a more 'gentle' approach to reforms in the financial system.

While the Obama administration has yet to deliver its plans for overhauling the financial industry to Congress - and those plans will have to be negotiated and approved by the lawmakers - there are some indications that the administration is not going to call for merging several government bureaucracies into a powerful federal regulatory agency and instead propose adding new regulators to the current mix.

Moreover, the announcement by the administration that 10 banks plan to pay back money they received through the bailout plan and its decision to reject the idea of direct government intervention in corporate pay decisions is bound to lead some critics to suggest that there is a return to 'business as usual' in Washington when it comes to dealing with the dysfunctional financial system.

Hence the Obama administration made it clear that when it comes to regulating corporate pay, it will issue regulations governing pay at companies that receive government assistance, such as AIG, and limit top executives at the publicly assisted firms to bonuses no greater than one-third of their annual salaries.

At the same time, the administration will not be seeking to regulate compensation for executives in the rest of the corporate world. Critics of the financial industry have proposed that the administration use the tax code to regulate executive compensation.

'We do not believe it's appropriate for the government to set caps in compensation,' Treasury Secretary Timothy Geithner told lawmakers. 'We're not going to prescribe detailed prescriptive rules for compensation. All those things would be ineffective, could be counterproductive in some ways.'

He also said that the administration will ask Congress to give shareholders an opportunity to affect executive pay and to require that corporate compensation committees be independent from company management. 'We'd like to see better transparency and accountability, frankly,' Mr Geithner explained.

The concern among Democrats on Capitol Hill that the Obama administration, in the face of pressure from Wall Street, may be retreating from its earlier commitment to use its power to force financial institutions to change their policies became evident when Mr Geithner testified in Congress after the announcement that 10 large banks - JPMorgan, Morgan Stanley, Goldman Sachs, US Bancorp, Capital One, American Express, BB&T, Bank of New York Mellon, Northern Trust and State Street - have been cleared to begin paying back billions of dollars in federal bailout money to the Troubled Asset Relief Programme (TARP).

Hence Mr Geithner was asked whether banks will make more loans once they are no longer tied to the TARP.

'What kind of assurance do you have that these banks that return this money are going to be issuing credit, which was one of the original goals?' Senator Richard Durbin, a Democrat form Illinois, asked the Treasury Secretary who admitted that the banks have not provided such guarantees.

The other bit of conventional wisdom is that the 'stress tests' given to the banks were too lenient, ensuring that the banks would pass them, has helped to add to the impression that the main goal of the administration was to restore confidence in the financial system as quickly as possible at the cost of a major restructuring of this system.

But Obama administration officials insist that they are not trying to restore the status quo ante but are adopting more 'realistic' policy goals that would eventually lead to some gradual changes in the architecture of the financial industry.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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