Business Times - 26 Mar 2010
Pumped up Obama heads for Wall St
He is ready to press for immediate legislation to reform the financial sector while resisting Republican pressure
By LEON HADAR
IN THE aftermath of their impressive legislative victory in getting the healthcare reform Bill approved in Congress over the weekend, US President Barack Obama and his Democratic allies on Capitol Hill seem to be in a fighting mode.
They have made it clear that they are ready to press for immediate legislation on comprehensive reform of the financial sector's regulatory system. And they are resisting the pressure from Republicans to slow-down the legislative process. Mr Obama and the Democrats hope to complete it even before the November mid-term Congressional election.
The Democratic majority in the House of Representative has already succeeded in getting that legislative branch to pass a bill last December. And on Monday, the action moved to the Senate where the key banking committee approved a similar sweeping regulatory reform measure aimed at warding off future collapses in the financial system.
The Senate Banking Committee voted 13 (Democrats) to 10 (Republicans) in favour of the Bill put forth by panel chairman Senator Christopher Dodd, a Democrat from Connecticut, moving it to the full Senate where a long debate is expected.
'This is going to take more work, obviously, we're not there yet,' Mr Dodd said in a press conference after the hearing. 'This allows us to buy some time to work on the product we need to present to our colleagues as a whole.'
Mr Dodd's proposal, which builds up on the bill that was passed in the House of Representatives, would establish a new consumer regulator housed in the Federal Reserve to protect consumers negotiating deals with mortgage lenders and credit card companies.
And it would also force banks and financial firms to strengthen capital reserves and create a new process for taking down giant failing companies and preventing future Wall Street bailouts.
Two elements in Mr Dodd's bill are expected to ignite opposition from some of the players in the drama, including the financial industry and the Federal Reserve. Federal Reserve chairman Ben Bernanke has already attacked the section in the Senate bill that would narrow the regulatory powers of the central bank to the top 50 bank holding companies. Mr Bernanke insists that regulating regional and state-owned banks should remain central and integral to the Fed's role in stabilising the financial system.
'Although it was not the case in the current crisis, instability can be generated by small institutions as well as by large ones, as occurred in the Great Depression or in the thrift crisis, to cite two particularly dramatic examples,' Mr Bernanke said during a speech last Saturday.
The proposed Senate bill also includes also a version of the proposal by former Fed chairman Paul Volcker - aka the Volcker Rule - which has been embraced by the White House and that would prohibit financial firms from owning hedge funds or from engaging in proprietary trading on their own accounts. Lobbyists for the financial industry have expressed strong opposition to this idea.
But the most politically significant part of the legislation would be the creation of a consumer financial regulator, an idea that has been promoted by Mr Obama for quite a while. He reiterated that point during a radio address last Saturday, suggesting that one of the main reasons for the financial melt-down were the decisions 'made by ordinary Americans to open credit cards and take on mortgages', without fully understanding the offers by the lenders 'who didn't always tell the truth'.
This was in part because 'the job of protecting consumers is spread across seven different federal agencies, none of which has the interests of ordinary Americans as its principal concern'. Hence, for the banking reforms to be complete, 'we need a consumer agency to advocate for ordinary Americans and help enforce the rules that protect them', concluded the president, stressing that 'I won't accept any attempts to undermine the independence of this agency' and 'I won't accept efforts to create loopholes for the most egregious abusers of consumers, from payday lenders to auto finance companies to credit card companies'.
The Senate bill proposed by Mr Dodd that would create a consumer financial protection regulator inside the Federal Reserve that differs from the House of Representatives' proposal, which calls for an independent agency.
The banks and their Republican allies have rejected the idea of an independent agency, and Mr Dodd's proposal amounts to a compromise - a consumer regulator that would be led by a director appointed by the president, confirmed by the Senate and housed in the Fed, that would be able to examine and enforce consumer rules at mortgage banks and financial firms and credit unions that have more than US$10 billion in assets.
Many Democrats and consumer advocates call for an independent agency with more regulatory power. Very much like the legislation approved by the House, the Senate bill calls for a creation of a nine-member advisory oversight council of regulators who would be able to offer early warnings regarding companies whose condition could trigger a financial crisis such as the Lehman Brothers fiasco.
While the Senate bill gives the Treasury Secretary a key role in that kind of oversight, the House bill assigns the Federal Reserve to play that role.
The Senate bill also directs large financial institutions that are at risk of collapse through speedier bankruptcy proceedings and assigns special clearing houses to assess the value of the complex financial products, aka derivatives. Much of the coming debate in the Senate is expected to focus on which derivatives will remain unregulated.
Lobbyists for the financial industry and many Republicans will try to do their best to prolong the debate over the bill in the Senate, hoping that the expected improvement in the economic conditions would lessen the public pressure on Congress to take swift action to reform the financial regulatory system.
But Mr Obama and his aides are pressing for a more speedy legislative process that would bring about the most sweeping overhaul of Wall Street regulations in generations.
'We are still living with the same financial system that brought us to the edge of collapse, and the success of the crisis response, without financial reform, will make future crises more likely,' Treasury Secretary Tim Geithner said in an address in Washington on Tuesday.
'If we don't get a strong bill now, here's what will happen,' he stressed. 'We're not going to move on to other things. We're going to keep fighting for reform. We're going to keep working with those who want a strong bill enacted into law. But in the meantime, the rest of the world is going to move on without us. If we don't lead, others will. They will move to protect their citizens and their economies with rules that fit their needs.'
And Mr Geithner, who is not known for his thrilling rhetoric, concluded his address with the following: 'To borrow the language of a general,' he said, 'financial reform is not a war of choice, it is a war of necessity. And to use the language of theology, this is a just war.'
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