The Obama administration’s ambitious draft plan to redraw U.S. financial regulation has been panned by banking groups, setting the stage for a bruising months-long battle among lawmakers and federal agencies.
Signs have already emerged that political reality is forcing the White House to narrow its goals, which include vastly expanding the Federal Reserve’s power to oversee the health of the entire financial system, creating a single banking overlord, merging the Securities and Exchange Commission (SEC) with the Commodity Futures Trading Commission (CFTC), and launching a new consumer protection agency.
The plan under consideration was circulating among lawmakers last week.
Veterans of past reform battles say the White House’s desire for legislative approval this summer is too ambitious given the scope of changes it wants to pursue.
“Picture a Rubik’s Cube, only with a thousand faces, and the colors all have to line up by this fall. Projects like this have been known to take decades. When you finally put pen to paper, somebody somewhere is against everything,” said Geoff Gray, a former staffer on the Senate Banking Committee.
Lawmakers are currently focused on a Supreme Court nomination, tax issues, and health care reform.
Congressional watchers say that at best, the House of Representatives might pass a package of financial reforms by the end of the year and the Senate may not get to it until well into 2010.
BANKERS SAY “NO”
The administration has been considering a new banking overlord to gather power from four existing regulators and become the main day-to-day regulator for most lenders.
Though a source familiar with the Treasury Department’s thinking said on Friday that the administration was backing away from this plan.
Sight unseen, the proposal was crucified by two large banking groups: the Independent Community Bankers of America, which speaks for nearly 5,000 regional lenders, and the American Bankers Association, representing all banks.
Creating a unified federal banking regulator “is both dangerous and shortsighted,” ICBA said in statement released late Thursday. The American Bankers Association sent Treasury Secretary Timothy Geithner a letter Friday saying creation of a single federal banking regulator would put state-regulated banks at a disadvantage.
Currently, U.S. banks have a large say in picking which federal regulator will best suit their business. During the housing boom, many banks that specialized in mortgage lending prospered under the Office of Thrift Supervision, an agency criticized by some lawmakers for lax supervision.
The idea of a new consumer agency to supervise financial products, such as mortgages and credit cards, has also been blasted.
The powerful U.S. Chamber of Commerce called it a “flat-out bad idea.” It and the Financial Services Roundtable, representing the largest financial services firms, do not believe consumer protection should be dropped by the Fed and placed into a separate, new agency.
“Protection is strengthened when the product and the bank are regulated by same agency,” said Scott Talbott, the Roundtable’s senior vice president. “If you split it up, each regulator only gets one side of the picture.”
As for merging the SEC and CFTC into a single markets regulator, turf wars on Capitol Hill will likely block that proposal. The SEC, which has been criticized for failing to detect the $65 billion Madoff fraud, is overseen by financial committees in the House and Senate. The CFTC answers to the agriculture committees of both houses.
The chairmen of the SEC and the Federal Deposit Insurance Corp oppose the draft plan’s idea to give the Fed authority to monitor risk through the financial system.
Successful models for regulatory reform may be the 2002 Sarbanes-Oxley corporate reform law and the 1999 Gramm-Leach-Bliley act that overhauled banking law.
Sarbanes-Oxley was quickly passed after accounting scandals at Enron and WorldCom rocked investor confidence. The Gramm-Leach-Bliley law, which allowed the merger of investment and commercial banks, was backed by then-President Bill Clinton and key Republicans who controlled Congress at the time.
Geoff Gray was a senior adviser to Senator Phil Gramm, the Texas Republican who led the Senate Banking Committee at the time, and he remembers 11 months of endless memos and meetings before the legislation passed.
Skirmishes between Congress and the financial services industry were common but lawmakers also witnessed internecine feuds between financial regulators, said former Representative Jim Leach, who chaired the House Financial Services Committee as the reform measure took shape.
“What was always interesting to me was the dilemmas that arose from the financial regulatory institutions,” Leach told Reuters. “Financial companies worry about money. Regulatory institutions are competitive about power and jobs.” (Additional reporting by Karey Wutkowski and John Poirier)