Financial rules may affect state companies
S&Ls, hedge funds could feel impact of Obama proposal
President Obama’s sweeping plan to overhaul the nation’s financial regulations could affect scores of Bay State institutions, ranging from small savings and loans to mighty hedge funds and other investment companies in Boston’s Financial District.
In an 88-page document, Obama laid out plans to blow up one federal agency, create a new one to better protect consumers, and more closely regulate financial institutions to head off the kind of risky investments that caused the current financial crisis.
The rules are also intended to increase scrutiny and capital requirements of the biggest financial institutions - those regulators deem are so important that any problems they develop would threaten the larger financial system.
It’s unclear whether Boston-based State Street Corp., one of the leading providers of services to the investment industry, would be deemed such a company.
However, State Street was among the 10 firms the government first tapped last year to receive taxpayer infusions intended to stabilize the financial system. Reached Thursday morning, a Fidelity spokesman said the company did not have an immediate comment.
Cornelius Hurley, director of Boston University’s Morin Center for Banking and Financial Law, said Obama missed an opportunity to replace a patchwork of government agencies with a single regulator.
“I think this proposal is a lot less ambitious than the original plan [that the Obama administration floated last month], and I think that’s unfortunate,’’ Hurley said.
Though it lacked details, the Obama plan called for increasing regulation of money market mutual funds - a huge business for Fidelity Investments and other investment companies based in Boston. Fidelity alone operates 38 money market funds with $483 billion in assets. Fidelity did not return calls for comment.
In addition, Obama’s plan would also affect Boston’s large hedge fund industry by requiring some firms to register and report to the Securities and Exchange Commission for the first time.
But Richard Goldman, a partner with Boston law firm Bingham McCutchen LLP, which represents several hedge funds, said the proposal would likely have only a modest impact.
Most hedge fund managers, he argued, already have “robust compliance procedures,’’ so the new rules would probably not increase their costs or change the way they manage money. And it could reassure potential customers their money is secure.
“It could be helpful for the confidence of the industry,’’ Goldman said.
Even so, Goldman doubted the new rules could prevent frauds like the Ponzi scheme pulled off by New York financier Bernard Madoff.
“If someone wants to put together an elaborate scheme, I don’t think registration will prevent it,’’ Goldman said.
Massachusetts Congressman Barney Frank, a Democrat and head of the powerful House Financial Services Committee, said he is “generally supportive’’ of the proposal, particularly the proposed creation of a new consumer watchdog, called the Consumer Financial Protection Agency. It would have broad powers to regulate credit cards, mortgages and other loans, and consumer financial products.
Traditionally, banking regulators responsible for making sure financial institutions are sound also have the additional responsibility of consumer protection. Frank said a separate agency with an explicit charge of protecting consumers is necessary.
“Financial regulators are always going to treat consumer issues as an afterthought,’’ Frank said. “Their main job is to keep the system going.’’
But Jon Skarin, policy director for the Massachusetts Bankers Association, said a consumer agency might pressure banks to limit interest rates and other fees they need to operate soundly. He said it makes more sense for traditional banking regulators to continue to handle consumer protection, in addition to other duties, rather than splitting the matters among several agencies.
“You are creating an additional layer of regulations without dealing with some of the issues out there,’’ said Skarin.
Local banks would also be affected by the Obama plan.
Specifically, Obama proposed eliminating the federal charter for thrifts and eliminating the embattled Office of Thrift Supervision, which oversees 19 thrifts in Massachusetts, and instead regulate thrifts more like traditional banks.
Thrifts, also known as savings and loans, typically specialize in offering community savings accounts and home loans. But because they focus on mortgages and other consumer loans, they were particularly vulnerable to the recent downturn in the housing market. And the thrift office has been accused of lax oversight. It was the agency responsible for overseeing Washington Mutual Inc. and IndyMac Federal Bank, two of the nation’s biggest bank failures, and troubled insurance giant American International Group.
In the future, Obama proposed that all federal banks and thrifts be regulated under a single new agency, the National Bank Supervisor.
Richard Collins, the chief executive of thrift United Bank of West Springfield, said he had mixed feelings about the proposal. He said United Bank was generally pleased with the oversight from the thrift office. But he also noted most of the differences between thrifts and banks had gradually disappeared.
“Every year, we are becoming a little less thrift-like,’’ he said.
The thrift proposal is one area where Frank disagreed with the president. “I think that having an emphasis on community-based lending is a good thing,’’ he said.
Todd Wallack can be reached at twallack@globe.com.
Correction: The original version of this story had the incorrect name for Bingham McCutchen LLP 