Obama Light Touch Overhaul

123jump.com Staff
17 Jun, 2009
New York City

President Obama unveiled the overhaul financial regulations that failed to impress investors and Wall Street. The plan appears to satisfy lobby groups of various financial products purveyors but fails to tackle the core issues of leverage and high interest rates on consumer products.

[R]5:30 PM New York –President Obama unveiled a plan to overhaul financial regulations that failed to impress investors and Wall Street. The plan appears to satisfy lobby groups of various financial products purveyors but fails to tackle the core issues of amount of leverage, high interest rates on consumer financial products and lack of risk bearing by banks in securitization.[/R]

President Obama unveiled a plan to reform financial system regulations that did not go as far as most people expected. The plan offers more powers to the Fed, assigns a new national regulator that will monitor system risk and eliminates the Office of Thrift Supervision.

The plan to increase Fed powers to regulate non-bank financial institutions and hedge funds is opposed by a many in the industry but is likely to gain traction with lawmakers as president called for a final bill by the end of the year.

In the last five decades Fed’s authority has substantially diminished as more than 60% of capital is now outside the Fed’s watch. This steady decline in authority remains at the heart of the current financial crisis.

President Obama called the Congressional lawmakers to appoint a separate agency to oversee consumer financial products including credit card debts, mortgage products and derivative instruments.

Insurance companies’ plan to have a single federal regulator rather than several state regulators did not gain traction with the White House as the demand from savings and loan associations for lesser regulations.

The plan calls for higher regulations on rating agencies but appears to be so light that rating agencies are likely to operate business as usual. Most analysts believe that rating agencies should share the burden of higher regulation as ratings of complex debt securities are at the heart of the current financial crisis.

It is also not clear how the powers of the SEC will be altered. The agency, watchdog for investors has largely been ineffective in monitoring fraud perpetrated by Bernard L. Madoff, mortgage market collapse and reckless securitization of mortgage securities by banks.

The president’s plan requires banks to retain at least 5% of securitized mortgages on the books, which most banking analysts find too little to have an impact on banks that simply want to unload risks to financial markets.

The plan is silent on the perpetual knowledge deficit in regulatory system of complex financial derivative products. The credit default swaps are neither registered nor regulated by any agency and it is not clear how new regulatory framework will handle these kinds of products that require staff that dictate terms to the Wall Street and not the other way around.

The president asked Congress to merge the Office of Thrift Supervision that failed to detect many problems at most failing banks with the Office of the Comptroller of the Currency that focuses on larger banks.

The president’s plans lacks originality and is not bold enough to deal with the Fed that largely operates on only one blunt instrument of interest rate changes. The Fed stance of easy credit that permits banks and brokerages to high leverage in large part is responsible for the current culture of low capitalization on the Wall Street.

Fed permits too much leverage in the banking system that needs to be curbed, but the president’s plan does not offer any insight into this critical issue.