Administration Releases Plan for Financial Regulatory Overhaul

As has been widely reported, President Obama today announced the release of his "New Foundation" for financial regulatory reform. At a press conference in the East Room, accompanied by congressional leaders and members of the financial regulatory system, Obama called for a “transformation on a scale not seen since the reforms that followed the Great Depression.”

The white paper broadly calls for more regulatory authority across the board in an effort to fix what Treasury Secretary Timothy Geithner and Larry Summers called “a framework...riddled with gaps, weaknesses and jurisdictional overlaps.” The Wall Street Journal has a very good bulleted outline of the plan, which focuses on five major areas: promoting supervision and regulation of financial firms, improving regulation of markets, revamping consumer and investor protections, enhancing the governments tools to deal with financial problems, and encouraging international regulatory reform.

Under the plan, three new major organizations would be created:

1) The Financial Services Oversight Council would replace the President's Working Group on Financial Markets and would be chaired by Treasury. The seven other members of the Council would come from the principal federal regulators.

2) The National Bank Supervisor will regulate federally chartered depository institutions and U.S. branches of foreign banks.

3) The Consumer Financial Protection Agency will be in charge of protecting consumer financial products and services. It will also be responsible for a broad consumer education program.

Despite the additions to the already existing alphabet soup of regulators, the plan does not call for a consolidation of the SEC and the CFTC. Instead, the Commissions will get together and submit a report on how to eliminate statutes and regulations that are redundant. The plan also call for the SEC to “strengthen the regulatory framework” around mutual funds amid speculation that that regulatory responsibility could have gone to Self-Regulatory Organizations.

At first glance, POGO thinks that many of the suggestions are sound, particularly in terms of expanding the powers of existing regulators (although to properly perform those functions, more funding will be needed). But we're also concerned that the proposal adds more cooks to an already overcrowded kitchen. The exception is the creation of the Financial Services Oversight Council, which would theoretically enhance cohesion between the authorities.

In his afternoon address, the President recognized the challenges and divisions over this pending legislation. We'll see what remains of his proposal on the other end of the brewing melee on the Hill.

-- Eric Orenstein