Obama's Financial Reform Plans Draw Critics

The Obama Tracker

NPR's Obama Tracker charts significant events and developments in the new administration, and actions the president takes as he settles into the job.

During its first 100 days, the Obama administration has been forced to contend with a rapidly deteriorating economy, brought on by a severe credit crunch and the type of global banking crisis not seen in decades.

Now comes the hard part: Finding a way to ensure that such a crisis doesn't happen again.

The administration is beginning the long, difficult task of overhauling the clunky regulatory apparatus that polices the nation's securities markets, which critics on both the left and the right acknowledge is inadequate to the task it's charged with.

In an era of mega-banks that do everything from sell insurance to trade commodities futures, the financial markets are still regulated by a confusing patchwork of state and federal agencies that often seem to have no clear lines of authority.

A Flawed Machine

Parts of the machine seem not to work at all: The Securities and Exchange Commission ignored repeated warnings that Bernard Madoff's investment empire was a house of cards. Meanwhile, regulators slept peacefully while big financial institutions built up a dangerous mountain of complex derivatives and credit default swaps that would later come crashing down around them, costing taxpayers dearly.

As a candidate, Obama laid the blame for the crisis on the movement to deregulate the financial markets, culminating in the 1999 Gramm-Leach-Bliley Act, which allowed banks, insurance companies, brokerage houses and trading firms to enter each other's businesses.

"Too many folks in Washington and Wall Street weren't minding the store," he said during a campaign appearance in October. "For eight years, we've had policies that have shredded consumer protections, that have loosened oversight and encouraged outsized bonuses to CEOs, while ignoring middle-class Americans."

The administration echoed those sentiments during the recent Group of 20 summit in London, endorsing a global call for stricter market regulation.

A 'Systemic' Regulator

Recently, the White House has begun laying out more concrete steps for reform, starting with Treasury Secretary Timothy Geithner's call for a "systemic regulator" in March.

One big reason the banking crisis has exploded is the growth of huge financial corporations like American International Group that do multiple things in the market and answer to no single regulatory agency, Geithner told Congress in March.

"U.S. law left regulators without good options for managing the failure of large, complex financial institutions," he said. "To address this will require comprehensive reform, not modest repairs at the margin, but new rules of the game."

Geithner's solution is the appointment of a single regulatory body like the Federal Reserve that would keep tabs on the market as a whole. When a very large company — one whose demise would threaten the entire financial system — gets in trouble, the regulator would look for ways to stabilize the company, perhaps by using taxpayer funds.

The idea has its critics, such as Peter Wallison of the American Enterprise Institute, who argues that it would create a special class of privileged banks that get government assistance in bad times.

"Any such designated 'systematically important' company will be able to drive out of the field any other competitor, so we will have very large firms dominating each of these areas, where today we have a lot of very vigorous competition," Wallison says.

Moving Too Slowly?

A Reagan administration official who was part of the long effort to deregulate the financial markets, Wallison says the Obama administration is mounting an "aggressive" campaign to change the markets.

But some reform advocates argue just the opposite, saying the president is moving too slowly, letting a historic opportunity for real change slip away. The public anger at the banks has given Washington officials a fertile political climate for overhauling the markets. As the months slip by and the banking sector recovers, the urgency of the problem can only erode, they say.

For all his populist rhetoric during the campaign, Obama has appointed moderates to key regulatory posts, many of whom have ties to the financial industry, such as SEC Chairman Mary Schapiro and Treasury Secretary Geithner.

'An Inside-The-Beltway Crew'

"Probably more than anything, they say that Obama was going to stick with an inside-the-Beltway crew that was going to be more inclined to stick with the status quo," said Lynn Turner, a former chief accountant at the SEC.

"To date, I don't think that the actions taken have matched what was said on the campaign trail, but we're fairly early on in the administration," Turner says.

Simon Johnson, former chief economist at the International Monetary Fund, says Congress and the administration may be reluctant to take on the financial lobby by moving too fast. He notes that House Financial Services Committee Chairman Barney Frank (D-MA) has pushed back any action on the "systemic regulator" idea until next fall at the earliest.

"What I've seen so far worries me, to be honest," said Johnson, now a professor of entrepreneurship at MIT and a senior fellow at the Peterson Institute for International Economics. "I think there are some people in the administration who have the right instincts, and I think the leadership at the very top of the White House is good.

"But I think they've been too deferential to big finance. I think they're too afraid of them, and I think they should be more willing to take them on."

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