Obama Introduces Sweeping Financial Overhaul

President Obama unveiled a plan to overhaul regulation of the nation's financial institutions Wednesday. He blamed the current economic crisis on a culture of irresponsibility by Wall Street, Main Street and Washington. Obama also said the government had to do more to protect consumers. The effort requires congressional action and would represent the most substantial revamping of the regulatory structure since the Great Depression.

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It's MORNING EDITION from NPR News. Renee is away, I'm Steve Inskeep. Good Morning.

Treasury Secretary Tim Geithner spends part of this day trying to sell something that is hard to oppose - in principle. He wants to change regulation of financial firms. Because of the credit crisis, that is hard to oppose in principle, but for the lawmakers Geithner will meet and the businesses who lobby them, the real battle is not in the principle, it's all on the details.

We will look at some of the details this morning, starting with NPR's John Ydstie.

JOHN YDSTIE: The president unveiled his 88-page guide to regulatory reform yesterday before a White House audience that included key lawmakers. He blamed the current crisis on a culture of irresponsibility that he said had taken root from Wall Street to Washington to Main Street. But he also blamed a failure of regulation.

President BARACK OBAMA: Millions of Americans who've worked hard and behave responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight. Our entire economy has been undermined by that failure.

YDSTIE: To avoid future meltdowns, the president offered what he called new rules of the road for the financial system. They include requirements that banks and other financial firms hold adequate capital as reserves against losses. The president also called for regulation of hedge funds. And he wants oversight of exotic securities like credit default swaps that help fuel the financial crisis. Most should be traded on public exchanges instead of privately between individual firms, according to his plan. Scott Talbot is with the Financial Services Roundtable, which represents nearly 100 of the largest financial firms in the country. He says his group thinks the president has made a good first step.

Mr. SCOTT TALBOT (Financial Services Roundtable): We support a number of provisions in here. There's some we oppose, so let's start with the ones we support. We support creating a systemic risk regulator that will have the ability to look over all of the institutions and look for trends and practices that could threaten the stability of the system.

YDSTIE: Talbot is talking about the president's proposal to put the Federal Reserve in charge of large firms whose failure could undermine the broader economy. The Fed would be advised by a council of other regulators. The Roundtable also supports giving power to regulators to take over large non-bank financial firms that are failing, much as the FDIC takes over failing banks. But Talbot's group doesn't like the proposal President Obama made yesterday to create a new consumer financial protection agency. Mr. Obama said it would police financial products and oversee the relationship between consumers and financial firms.

Pres. OBAMA: This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want and actually understand.

Mr. TALBOT: It's a bad idea. We oppose the consumer financial protection agency.

YDSTIE: The reason, says Talbot, is there would be one regulator for the bank and another for the product.

Mr. TALBOT: You're separating out the regulation of the bank from the products it sells. And so each regulator in that scenario would only have half the picture. And we feel that weakens the overall system.

YDSTIE: Ellen Seidman doesn't think that's a serious problem. Seidman is the former top regulator at the Office of the Thrift Supervision and now a senior fellow at the New America Foundation, a Washington think-tank. She is a bit stunned and pleased at the president's consumer protection proposal.

Ms. ELLEN SEIDMAN (New America Foundation): It's really important to understand how revolutionary the fact that consumer protection is item number three in a five-item incredibly comprehensive proposal about financial services reform.

YDSTIE: Seidman also agrees with the administration's call to eliminate the Office of Thrift Supervision, which regulates savings and loans. That still leaves three federal bank regulators. Seidman says it would be better if there were just one. Then banks couldn't shop around for the most lenient regulator, as they do now. But, Seidman says, entrenched interests, including powerful lawmakers, the regulators themselves, and the banks, make getting down to one very difficult. Those kinds of political battles will make it a challenge to meet the president's deadline to pass a reform package by the end of the year.

John Ydstie, NPR News, Washington.

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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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