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.