WASHINGTON — The Obama administration is proposing the broadest changes in financial regulation since the Great Depression, calling for the elimination of some bank regulators and giving the Treasury Department and Federal Reserve vast new authority.
"We are going to put forward a very strong set of regulatory measures we think can prevent this kind of crisis from happening again," President Barack Obama said Tuesday from the Rose Garden.
Senior administration officials late Tuesday confirmed that on Wednesday Obama would propose the elimination of the much-maligned Office of Thrift Supervision, which regulates savings and loan institutions, and had oversight of the financial products division of failed insurer American International Group. The company's collapse has cost taxpayers more than $180 billion, and AIG is now almost 80 percent owned by the Federal Reserve.
Under Obama's much-anticipated regulatory proposal, the OTS would be merged with the Office of the Comptroller of the Currency, which regulates a large number of big banks, and a new entity will be created. The revamping would eliminate separate federal charters for banks and thrifts and treat financial institutions alike from a regulatory standpoint.
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This addresses one of the regulatory shortcomings that brought about the financial crisis, as banks and other financial players shopped among regulators for the agency least likely to regulate them.
The Federal Reserve would gain new powers under the proposal. It would be tasked with monitoring the banks and other financial institutions so large that they're deemed a risk to the broader U.S. and global financial system.
In an interview late Tuesday with Bloomberg Television, Obama said of the Fed empowerment that "we have to have somebody who is responsible for seeing the risks (in) the system as a whole and not just individual institutions. And I think the Fed is best positioned to do that."
Obama also will propose the creation of a Financial Services Oversight Council. It would be a council of regulators, led by the Treasury Department, which collectively would police developments in the financial system with an eye toward ensuring adequate reserves in banks and watching for potential risks to global finance.
Congress will be asked to give Obama new tools to empower regulators. Chief among these tools would be the ability for regulators to dissolve large institutions that pose risks to the financial system without having to force them into bankruptcy. The lack of such authority led to the failure in September of investment bank Lehman Brothers, which triggered a global panic that forced the Fed to seize and protect AIG.
"We can't have this false choice between bailouts or financial collapse," said an administration official who briefed reporters on the condition of anonymity because the president hadn't publicly spelled out his plans.
The proposed revamp of financial regulation contains numerous technical but important details. For example, companies that package and pool loans for sale into secondary markets — as is common for mortgages, car loans and other types of consumer lending — would have to retain a portion of these loans on their own balance sheets. The absence of such requirements encouraged shoddy underwriting because the bad loans were resold with little consequence to the banks that had underwritten them.
This process of pooling loans is called securitization. Credit-rating agencies such as Moody's, Fitch and Standard & Poor's deepened the problem by giving top ratings to these securitized loans, creating the false impression they were safe investments when often another arm of the same rating agency helped stitch together these complex pools. Under Obama's plan, credit-rating agencies also would come under federal supervision.
The administration also will propose creating a special commission that would regulate consumer credit, watching for misleading advertising and predatory lending by credit card companies, payday lenders and mortgage brokers who help arrange financing for home purchases but have had no duty to prospective home owners. This would involve shifting powers now with the Fed and other regulators, although the Securities and Exchange Commission wouldn't lose its investor-protection powers.
The Obama plan largely parallels what lawmakers are already preparing, Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, told McClatchy Tuesday.
"I don't see huge differences between us and the administration," said Frank, hinting that lawmakers may take the consumer protections even further. "Elected officials are almost always more sensitive to consumer protection than are appointees."
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