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New agency would rise from plan

Consumer office would handle lending oversight

President Obama delivered his proposal to overhaul the nation's financial regulatory system yesterday at the White House. President Obama delivered his proposal to overhaul the nation's financial regulatory system yesterday at the White House. (Pablo Martinez Monsivais/ Associated Press)
By Jim Kuhnhenn and Martin Crutsinger
Associated Press / June 18, 2009
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WASHINGTON - From simple home loans to Wall Street’s most exotic schemes, the government would impose and enforce sweeping new “rules of the road’’ for the nation’s battered financial system under an overhaul proposed yesterday by President Obama.

Aimed at preventing a repeat of the worst economic crisis in seven decades, the changes would begin to reverse a determined campaign pressed in the 1980s by President Reagan to cut back on federal regulations.

Obama’s plan would do little to streamline the alphabet soup of agencies that oversee the financial sector. But it calls for fundamental shifts in authority that would eliminate one regulatory agency, create another, and both enhance and undercut the authority of the powerful Federal Reserve.

The new agency, a consumer protection office, would specifically take over oversight of mortgages, requiring that lenders give customers the option of “plain vanilla’’ plans with straightforward and affordable terms. Lenders who repackage loans and sell them to investors as securities would be required to retain 5 percent of the credit risk - a figure some analysts believe is too low.

In all, Obama’s broad proposal cheered consumer advocates and dismayed the banking industry with its proposed creation of a regulator to protect consumers in all their banking transactions, from mortgages to credit cards. Large insurers protested the administration’s decision not to impose a standard, federal regulation on the insurance industry, leaving it to the separate states as at present. Mutual funds succeeded in staying under the jurisdiction of the Securities and Exchange Commission instead of the new consumer protection agency.

Obama cast his proposals as an attempt to find a middle ground between the benefits and excesses of capitalism.

“We are called upon to put in place those reforms that allow our best qualities to flourish - while keeping those worst traits in check,’’ Obama said. The president has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year’s end.

“We’ll have it done this year,’’ pledged Senator Chris Dodd, a Connecticut Democrat, and chairman of the Senate Banking Committee.

But Dodd, who had been at Obama’s side in the East Room of the White House for the announcement, raised questions about one of the plan’s key features - giving the Fed authority to oversee the largest and most interconnected players in the financial world.

Obama’s proposal would require the Fed, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury Department approval before extending credit to institutions in “unusual and exigent circumstances.

But the proposal also would do away with a restriction imposed on the Fed in 1999 when Congress lifted Depression-era restrictions that allowed banks to get into the securities and insurance business. The Fed, as the regulator for the larger financial holding companies, had been prohibited from examining or imposing restrictions on those firms’ subsidiaries. Obama’s proposal specifically lifts that restriction, giving the Fed the ability to duplicate and even overrule other regulators. At the same time, the new consumer agency would take away some of the Fed’s authority.

Fed defenders argue that none of the major institutional collapses - AIG, Bear Stearns, Lehman Bros., Merrill Lynch, or Countrywide - were supervised by the Fed. Critics argue the Fed failed to crack down on dubious mortgage practices that were at the heart of the crisis.

Administration officials insist that a central tenet of their plan is a requirement that from now on financial institutions will have to keep more money in reserve - the best hedge against another meltdown.

That may appear to be a no-brainer: If banks and other large institutions have more money, they won’t be vulnerable if their risky bets go bad.

However, banking regulators have been arguing for years over implementation of an international standard for bank capital. Treasury Secretary Timothy Geithner said yesterday he hoped to move on enhanced capital standards “in parallel with the rest of the world.’’

The plan had its share of winners and losers, both inside and outside government. Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., lost her bid to have a regulatory council, not the Fed, regulate large firms whose failure could undermine the entire system.