New Federal Consumer Protection Agency

On June 17th President Obama announced plans for a new Consumer Protection Agency, ending an error of the US economy. The new "super" federal agency will have power to regulate banks, mortgages and Hedge Funds. This announcement of the new Consumer Protection Agency will include the biggest change to the federal government and it's power over US business since the great depression.

President Obama on Wednesday unveiled his long-anticipated plan to restructure how banks and other firms are regulated in the hope of preventing another financial collapse.

The far-reaching effort would reorder the roles of some key agencies to try to tighten government supervision of the financial sector. It would also toughen up standards for big financial firms and create a new agency dedicated to consumer protection.

"We did not choose how this crisis began. But we do have a choice in the legacy this crisis leaves behind," Obama said. "So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."

Obama proposed getting rid of the embattled Office of Thrift Supervision and merge it with the Office of the Comptroller of the Currency, according to details released Wednesday.

The OTS has been on the hot seat for months for its role as the overseer of American International Group and failed lenders IndyMac and Washington Mutual. The comptroller's office is a Treasury Department bureau that regulates national banks.

President Obama wants to expand the powers of the Federal Reserve and the Treasury Department.

Obama called for the creation of a council of regulators chaired by the Treasury secretary to work alongside the Fed to monitor system-wide risk.

The Treasury would also officially keep powers it has already been wielding to approve government action aimed at saving a company that's teetering on the verge of collapse.

Obama said regulators had been charged with "seeing the trees, not the forest."

"As a result, the failure of one large firm threatened the viability of many others; the effect multiplied," Obama said. "There was no system in place that was prepared for this kind of outcome. And more importantly, no on has been charged with preventing it."

In addition, Obama proposed the establishment of a new watchdog agency aimed at protecting consumers from deceptive or dangerous mortgages, credit cards and other financial products.

"This crisis was not just the result of decisions made by the mightiest of financial firms; it was also the result of decisions made by ordinary Americans to open credit cards, take out home loans and take on other financial obligations," he said.

Obama explained that the new agency would lay out new rules for mortgage lending, "so that the bad practices that led to the home mortgage crisis will be stamped out."

Most of the proposals will have to be approved by Congress, which has its own ideas about reforming the financial regulatory structure.

Obama also acknowledged that his proposal will likely spur controversy.

"There has always been a tension between those who place their faith in the invisible hand of the marketplace -- and those who place more trust in the guiding hand of the government," Obama said. "That tension isn't a bad thing."

"We are called upon to recognize that the free market is the most powerful generative force for our prosperity -- but it is not a free license to ignore the consequences of our actions."

Mixed bag for banking industry

Lawmakers have begun hearings on the issue of regulatory reform.

But final legislative passage could be a lengthy process, veteran Hill watchers say.

One sticking point may be new powers the proposal would grant the Fed to force big financial firms, including those that aren't banks, to keep a certain amount of money aside in reserves.

Some in the banking industry said the new capital requirements appear tougher than they had originally thought.

Jaret Seiberg, a policy analyst with Concept Capital's Washington Research Group, called the proposal "worse for the financial sector than was expected." He points out that regulators can require banks to shore up their capital levels even if Congress balks at that piece.

Obama defended his plan to empower the Fed to hold banks and large financial firms more accountable, saying that "if you can pose a great risk, that means you have a great responsibility."

A lot of banks and trade organizations oppose the new consumer protection agency -- especially the idea of giving it power to curb financial products if they're found to be deceptive or unfair.

"We have a concern creating another regulatory burden, and wonder how they plan on paying for the agency," said Dan Berger, head lobbyist for the National Association of Federal Credit Unions, which otherwise supports the reform plan.

But most of the banking industry expected -- and some even called for -- giving the Federal Reserve more powers to monitor systemic risk and setting up a new way to unwind big financial firms.

Scott Talbott of the Financial Services Roundtable said banks "won, tied and lost," in the proposal, pointing out aspects they supported, opposed and could put up with.

And the Financial Services Forum, which represents 17 chief executives, said overall, the proposal appears "comprehensive" and "reasonable," said president Rob Nichols.

"I think this is a great start of the dialogue for what's going to take place on the Hill over the next six months," Nichols said.

Securities and derivatives also on agenda

The White House also aims to tighten up supervision of the securitization markets, requiring firms that originate a security to keep 5% of the "securitized exposure." That means whoever created the financial product would still hold a piece of it, even as it got resold, and would have some interest in its ultimate performance.

The bill calls for the regulation of all over-the-counter derivatives, including the kind of credit default swaps that led to the collapse of AIG. In addition, officials want to make sure that such products aren't marketed to "unsophisticated" investors.

The Obama plan would address the conflicts of interest that occur when financial firms work with rating agencies to get a golden seal of approval on a financial product.

Rating groups have been blamed for exacerbating the financial crisis by giving top ratings to bad financial products. The official speaking Tuesday did not offer details as to how rating agency oversight might be toughened.

Finally, the Federal Deposit Insurance Corp. could get more power to take over and unwind financial companies, beyond banks, that are in deep trouble.

The last sentence is troubling, how can we expect to reinvigorate the economy if our financial institutions are forced to double their reserves by the new consumer protection agency.

Own your own business for $10 a month?

Is this beginning of the Frank-Dodd economic reform bill?

Obama's plan does not attempt major consolidation of regulatory agencies and does not inject itself in an ongoing debate over whether to bring some insurance companies under federal oversight.

Asked on CNBC whether the plan stopped short out of political concerns, the Obama said: "We want to get this thing passed. We think speed is important ... but we don't want to tilt at windmills. ... We want to get the best regulatory system in place."

Obama's decision to create a consumer agency comes amid criticism that mortgage lenders and credit card companies have taken advantage of unwitting customers and saddled them with debt. The financial crisis was precipitated in part by the preponderance of securities backed by mortgages that went sour when the housing market collapsed.

Treasury spokesman Andrew Williams said lax consumer protections contributed to the financial crisis and that the recession revealed even more weaknesses in consumer protections across the spectrum of financial markets. The new agency, he said, will "help ensure that consumers have the protection and the representation they deserve."

The new regulator would have the power to impose fines and allow states to pass laws that are stricter than the federal standards — an approach favored by consumer advocates. Consumer protections are now spread among various state and federal authorities, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission and banking regulators.

"Tremendous problems could have been avoided had such an agency weighed in against some of the abusive practices that Congress acted on only recently," said Travis Plunkett, legislative director of the Consumer Federation of America, citing excessive bank fees and misleading practices.

But business leaders made their opposition clear.

David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets, said the chamber will oppose a standalone agency "that cannibalizes regulatory expertise, adding yet another regulatory layer."

The administration will also have to use its political skills to strengthen the Fed. While Democrats generally agree with a need for regulatory changes, many oppose relying too heavily on the Fed.

They say its status as a politically independent organization would make it difficult to keep the newly empowered organization in check.

"What happens if the representatives of the people and the president want a certain action and it's not taken?" asked Rep. Paul Kanjorski of Pennsylvania, a senior Democrat on the House Financial Services Committee.

"You can't fire the chairman of the Federal Reserve," Kanjorski said.

Likewise, Sen. Christopher Dodd, chairman of the Senate Banking Committee, opposes adding new tasks to the Fed. In private deliberations with the administration, Dodd has advocated an alternative plan to strip the Fed of its regulatory role entirely and create a new consolidated bank regulator that would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks.

Under this scenario, the Fed would focus on its existing mission as the nation's central bank — setting monetary policy and acting as a "lender of last resort."

Dodd, however, is a strong proponent of a consumer protection agency and is likely to champion that component of Obama's plan.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has not taken a position on the administration's plan to bolster the powers of the Fed. A spokesman said Frank supports the idea of monitoring risk across the financial system.

In a staff document circulated last week, House Republicans on the committee argued that expanding the Fed's responsibilities and increasing government spending pose "a far more significant source of 'systemic risk' to our nation's economy than the failure of any specific financial institution."