Monday, March 08, 2010

Roadblocks to Obama's financial reform plan

Business Times - 09 Mar 2010

Roadblocks to Obama's financial reform plan

Wall Street sees plan to create powerful watchdog for consumers as a threat to its profits


LEGISLATION for financial reform that gives the federal government a larger role in regulating financial products such as securities and derivatives seems to be making some headway in Congress in recent days.

In the Senate, where it has been stalled for quite a while, reports now suggest that the Senate Banking Committee appears closer than ever to a bipartisan agreement on a bill that could lead to major reform of the US financial sector.

The House of Representatives, where Democrats maintain a clear majority, has already voted in favour of a financial regulation bill. But in order to get Congress to approve legislation on this issue, the more conservative Senate, where Republicans exert more legislative power, has to pass a similar legislation.

One of the most contentious issues in the Senate has to do with the plan to form an independent Consumer Financial Protection Agency (CFPA) that would oversee consumer financial products such as credit cards and mortgage loans.

These were exactly the kind of financial products that had been marketed in the past to uninformed consumers and those with low credit scores. All this led to personal and business bankruptcies that in turn created the conditions for the devastating financial meltdown and the ensuing Great Recession.

Many Democrats and consumer advocates backed by President Barack Obama want to see the creation of an independent CFPA, a powerful regulator whose sole mission would be to protect consumers - as opposed to the interests of the financial industry. Indeed, the House of Representative's legislation calls for a powerful new agency with rule-making and enforcement powers and an independent director appointed by the president. And many of the Democrats in the Senate support such a plan.

Currently, it is another government agency - the Federal Deposit Insurance Corporation (FDIC) - that is responsible for protecting the financial soundness of banks as well as consumers.

Critics have argued that regulators at the FDIC have become too close to the banks they regulate and are more concerned about the interests of Wall Street than about the problems facing the average US consumer.

Moreover, the large contingent of well-paid lobbyists for the financial sector that injects contributions to both Republican and Democrat lawmakers continues to exert enormous influence on Congress, putting many obstacles in the way of any serious efforts to reform the current financial regulatory system. Wall Street sees this plan to create a powerful government watchdog for consumers as a threat to its own profits and interests.

Thus the more pro-business Republicans have been leading the effort in Congress to prevent the creation of an independent CFPA, arguing that it would end up clashing with existing agencies and create a new layer of bureaucracy.

In fact, the Republicans had initially proposed that any consumer protection body be part of the existing FDIC. Warning of 'politicisation', the Republicans were also opposed to any idea of integrating the proposed consumer watchdog into the Department of Treasury.

In any case, since the 41 Republican senators could torpedo any proposal by the 59 Democrats to create a separate CFPA, the chairman of the Senate Banking Committee, Chris Dodd, had no choice but to fashion a compromise financial reform bill with a leading Republican on the committee, Bob Corker of Tennessee.

Congressional sources suggested last week that Democratic and Republican senators seemed to have agreed to put the consumer watchdog agency inside the US Federal Reserve which would have the authority to write and enforce regulations on, among other things, credit cards and mortgages.

But some Republicans, including the highest ranking member of the Banking Committee, Richard Shelby from Alabama, who are not in favour of expanding the enforcement power of the Fed are resisting the compromise.

In addition, many Democrats, including Barney Frank, chairman of the House of Representative's Financial Services Committee who helped author the financial reform bill in the House, believe that the Fed is too tilted in Wall Street's favour. They accuse it of failing to protect US consumers from harmful financial products. They call the Senate proposal to integrate the CFPA in the central bank 'a joke'.

White House officials have indicated that the Obama administration will only accept an independent and powerful CFPA with rule-making and enforcement authority. But observers in Washington agree that the administration and the Democrats may have no choice but to reach a compromise with the Republicans if they want to see any financial reform legislation approved before the mid-term election this year.

Some Democrat lawmakers and activists have suggested that if the Republicans sabotage the creation of an independent consumer protection agency, the Democrats could use that as a powerful political weapon against their rivals at a time of rising populist sentiment and accuse them of 'cozying up' to Wall Street, a message that could help the Democrats during the Congressional races in November.

But here is the problem confronting the White House and the Democrats: The US Supreme Court has just passed a ruling that would set no limit on the amount of money that private businesses, including financial firms, would be allowed to contribute to political campaigns.

That means that Wall Street will be in a position in November to punish Congressional candidates opposed to their interests.

If the Obama administration cannot get its financial reform legislation this year, it is even less likely that the Democrats would be able to win backing for their version of a financial reform bill next year.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

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