Obama Plans For Financial Regulation Overhaul

President Obama is expected to propose changes to overhaul the nation's financial regulatory system Wednesday. The aim is to fix the failures that led to the global economic meltdown.

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RENEE MONTAGNE, host:

President Obama today unveils a sweeping overhaul of financial regulations. It's an overhaul aimed at fixing failures that led to the global economic meltdown. Among the proposals: the creation of a Consumer Financial Protection Agency, and also the elimination of one bank regulator. NPR has obtained a near-final draft of the administration's proposals, and our economics correspondent John Ydstie joins us now to talk about it.

Good morning, John.

JOHN YDSTIE: Hi, Renee.

MONTAGNE: Tell us about this document. For one thing, it shows the Federal Reserve gaining power in one area, but losing power in another.

YDSTIE: Right. The administration has been saying for some time that it wants to give the Fed more power to oversee large financial firms whose failure could undermine the whole system - companies like AIG, which were, of course, part of the cause of the recent crisis. So that proposal is in the white paper the president is issuing today.

But the Fed's power to take some of the unusual emergency action it has during this crisis would be reined in somewhat, requiring an okay from the Treasury. And in addition, the Fed would lose some of its consumer protection authority to this new entity, the Consumer Financial Protection Agency.

MONTAGNE: And what's the thinking behind taking away consumer protection authority from the Fed and then putting it into a new agency?

YDSTIE: Well, one reason is a feeling on Capitol Hill that the Fed dropped the ball on protecting consumers from products like subprime mortgages, that are at the heart of this financial crisis. Remember, Alan Greenspan was warned about them by a Fed governor several years before the crisis, but he declined to crack down on them.

But another reason is that, as President Obama said in interviews yesterday, there just needs to be one regulator focused on and responsible for looking after consumers and scrutinizing financial products like credit cards and mortgages.

As the administration has pointed out, you can buy a toaster for about 30 bucks, and it's more highly regulated than a mortgage that will cost you hundreds of thousands of dollars. But both can cost you your home if they catch fire.

MONTAGNE: So in the president's proposal, there's a new consumer protection agency, but one less bank regulator.

YDSTIE: Right. The administration had said it - one of its goals was to streamline banking regulation because there are too many regulators, and banks could shop around for the most lenient one. And since most of the regulators are supported by fees from the banks, there's competition to attract banks. So the administration is proposing to eliminate one regulator, the Office of Thrift Supervision, actually merge it with another regulator, the OCC, and then change the name.

But that still leaves three federal regulators, not to mention state bank regulators.

MONTAGNE: Talking to NPR economics correspondent John Ydstie. And John, it doesn't sound like a whole lot of streamlining.

YDSTIE: No, it's not. But the problem is that there are powerful interests protecting their turf. And the administration may feel it's not worth a fight, especially since there's so much more they want to do, like force banks to hold more reserves against losses, institute some regulation of hedge funds and things like that.

MONTAGNE: Just let me - this new Consumer Financial Protection Agency, is it likely to have enough support in Congress, for instance, to get off the ground?

YDSTIE: Well, consumer groups are very strongly for it, but the financial industry opposes it very strongly. They argue it's going to undermine consumer protections already in place, and that it might make consumers less likely to take responsibility for their own actions. So this is likely to produce a big fight.

MONTAGNE: John, thanks very much.

YDSTIE: You're welcome, Renee.

MONTAGNE: NPR economics correspondent John Ydstie.

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Obama Unveils New Financial 'Rules Of The Road'

President Obama on Wednesday unveiled a multipronged plan that aims to protect the U.S. financial system from another meltdown by giving regulators broader involvement across the financial spectrum — from bank holding firms and big companies to individual borrowers.

Joined by Treasury Secretary Timothy Geithner and other top financial advisers at the White House, Obama proposed giving the Federal Reserve more authority to regulate bank holding companies and other large firms whose failure could endanger the U.S. economy. He also called for creation of a new agency that would oversee credit and lending practices, protecting borrowers from entering into the types of risky loans that resulted in the nationwide housing crisis.

"Financial institutions have an obligation to themselves and to the public to manage risks carefully. And as president, I have a responsibility to ensure that our financial system works for the economy as a whole," Obama said at a news conference later.

Obama said the financial overhaul is part of his plan to build a new foundation for growth and prosperity that includes changes in the country's education and health care systems, as well as credit card reforms.

In an 88-page document detailing the proposed changes, the White House said the country's post-Depression regulatory system was not sufficient to deal with the abuses and excesses that led to the unraveling of major financial institutions. It notes that the regulatory system was poorly equipped to handle today's complex financial instruments.

One of the key weaknesses of the current system, according to the document, is that agencies and regulators are responsible for overseeing individual companies, while no one has been charged with looking at the stability of the financial system as a whole.

"Regulators were charged with seeing the trees, not the forest," Obama said. "Even then, some firms that posed a so-called systemic risk were not regulated as strongly as others; they behaved like banks but chose to be regulated as insurance companies, or investment firms, or other entities under less scrutiny. As a result, the failure of one large firm threatened the viability of many others."

The president said he consulted lawmakers, business experts and consumer advocates in drafting the changes. He urged Congress to act quickly on his plan, while acknowledging that some will say he is proposing too much new regulation while others will complain it's not enough.

"We do not want to stifle innovation," Obama said. "But I'm convinced that by setting out clear rules of the road and ensuring transparency and fair dealings, we will actually promote a more vibrant market. This principle is at the heart of the changes we are proposing."

Key elements of Obama's proposal include:

• Establishing the Consumer Financial Protection Agency to review credit and lending practices, providing some protection for potential homeowners, students and credit card holders. Some powers would be ceded by the Federal Reserve and other government agencies.

• Requiring that all lenders be held to the same standards as banks, and that mortgage brokers provide clear and concise disclosures.

• Creating a pathway for regulators to dismantle troubled companies. The Federal Deposit Insurance Corp. would have a system to sell a company's assets if the Treasury Department and the Federal Reserve decide that its failure would pose a threat to the nation's economy.

• Requiring that lenders retain a 5 percent stake in all asset-backed securities in order to discourage risky loans and the practice of passing at-risk assets off to other investors.

• Eliminating the Office of Thrift Supervision, which oversaw institutions such as Washington Mutual and AIG that turned into some of the biggest failures of the economic crisis.

• Establishing the Financial Services Oversight Council to monitor the overall health of the U.S. financial system.

• Requiring that shareholders vote on compensation packages for executives in the financial industry.

• Promoting increased supervision and regulation of financial companies by bolstering the authority of the Federal Reserve, requiring increased capital commitments to offset loans and off-sheet commitments.

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