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President delivers warning to Wall St.

By Michael Kranish
Globe Staff / September 15, 2009

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President Obama traveled to the heart of New York’s financial district yesterday and declared that some business leaders are “choosing to ignore’’ the lessons of last year’s economic collapse, warning that signs of a rebound have not diminished the need for greater oversight of Wall Street.

In a speech that marked the one-year anniversary of the failure of Lehman Brothers, Obama urged Congress to act soon on a raft of White House proposals intended to tighten up the financial system and reduce the practices that led to last year’s $700 billion federal bailout of financial institutions.

“We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,’’ Obama said.

The speech at Federal Hall in downtown New York received mixed reviews from finance executives. Industry representatives said afterward they welcomed some of the president’s ideas, but they remained strongly opposed to one of his more controversial proposals: creating a federal agency to regulate consumer loans.

An accord between the SEC and Bank of America Corp. over bonuses paid at Merrill Lynch was rejected. B6

Republicans, too, immediately levied strong criticism at the president’s plan, calling the broad legislation an unwarranted intrusion on markets that could hamper the nascent economic recovery.

Obama introduced his legislation in June, responding to the worst economic crisis since the Great Depression. In addition to a new agency to regulate consumer credit, including mortgage lending, the plan would give government the ability to take over failing investment firms, crack down on unregulated derivatives trading, impose disclosure and registration rules on hedge funds, and subject some executive compensation to shareholder approval.

House Financial Services Committee chairman Barney Frank of Massachusetts, who joined Obama at the speech, is slated to hold hearings on the legislation this month. After flying back from New York City with Obama aboard Air Force One, the Democrat predicted in a telephone interview that the legislation would pass in the House despite protests from some in the financial industry.

“The major financial institutions have lost their political clout’’ as a result of the economic crisis, the congressman said. “They don’t have any.’’

But the fate of the measure is unclear in the Senate, where 60 votes would be needed to overcome a filibuster. The effort in the Senate is being overseen by Senate Banking Committee chairman Christopher Dodd of Connecticut, who passed up an opportunity to head the panel writing health care legislation to play a key role in the financial bill.

Senator Judd Gregg, the ranking Republican on the Budget Committee, who previously was a key supporter of a program that provided billions of dollars of capital to banks, said in a statement that Obama’s proposal for new regulations shows the president is “entering a new and also dangerous phase.’’

Gregg said he was worried Congress will enact “regulatory schemes which will fundamentally undermine risk taking, capital formation and entrepreneurship, and thus hurt future job growth and American competitiveness so key to any economic recovery. Much of what the administration has proposed, and what is being discussed in the House, will have exactly that effect,’’ he said.

Republican National Committee chairman Michael Steele criticized Obama’s speech as evidence of the president’s desire to enlarge the role of government.

“Every time he has wanted to expand the government’s influence over the economy and our daily lives, from his takeover of GM and banks to his proposed government-run takeover of our health care, it has meant spending more money we don’t have and digging America deeper into debt,’’ Steele said.

The speech was delivered at a time when taxpayers are heavily invested in a variety of businesses as a result of bailout efforts begun during the Bush administration and continued by the Obama administration. The government has large stakes in General Motors, Chrysler, insurance giant American International Group, and many banks. While Obama noted that some of the money given to banks has been repaid with 17 percent interest, many other loans are outstanding and it is unclear whether the terms will be met.

Obama seemed to get a cool reaction. At one point in his speech, he warned that “those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.’’ The president then paused, as if waiting for applause. There was none. Analysts on cable television networks that carried the speech live noted there was little applause throughout the speech.

One in the audience, Scott Talbott, head lobbyist for Financial Services Roundtable, whose group represents 100 of the largest financial institutions, said in a telephone interview afterward that many in the business community believe they have already taken steps to prevent a repeat of the economic crisis.

Nonetheless, Talbott sounded more conciliatory about parts of the White House plan than did some Republican leaders, saying some form of the financial regulation legislation is likely to become law because “there is an economic as well as a political need to strengthen our regulatory framework.’’

Talbott said “mistakes were made’’ by the financial industry, the biggest of which was an overreliance on increases in real estate values and not enough emphasis on the ability of borrowers to repay. That led to a profusion of subprime loans that played a key role in the crisis.

Companies generally support Obama’s proposal for expanding financial rules, Talbott said. And he agreed with the administration the current regulatory scheme is too fragmented, saying, “We don’t have anybody overseeing all of the players. That is a step that needs to occur.’’

But Talbott and other financial leaders are strongly opposed to the president’s proposal to create a Consumer Financial Protection Agency, which would regulate many types of consumer loans.

The agency, however, is a centerpiece of Obama’s plan, and the possibility is growing that a protracted fight over it could torpedo the entire legislation, just as debate of the “public option’’ in the health care plan has cast a shadow over prospects for that bill.

Obama is taking a similar approach to financial reforms as he is with health care, reaching out to industry groups, while also sternly warning that action must be taken. “I want to say very clearly here today, we want to work with the financial industry to achieve that end,’’ Obama said. “But the old ways that led to this crisis cannot stand. And to the extent that some have so readily returned to them underscores the need for change and change now. History cannot be allowed to repeat itself.’’

Heather Booth, director of a coalition of consumers that favors the legislation, said she hoped Obama’s speech would galvanize the public to demand passage. “With the speech, we start to turn to a time of hope, if people see they can really do something about it,’’ she said of the economic crisis.