Obama Plans Fast Action to Tighten Financial Rules
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return encodeURIComponent('Officials say they will make wide-ranging
changes, including stricter federal rules for hedge funds, credit rating
agencies and mortgage brokers.');
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return encodeURIComponent('Subprime Mortgage Crisis,Regulation and
Deregulation of Industry,United States Economy,Emergency Economic Stabilization
Act (2008),Timothy F Geithner,Barack Obama');
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return encodeURIComponent('By STEPHEN LABATON');
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return encodeURIComponent('January 25, 2009');
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By STEPHEN LABATON
Published: January 24, 2009
WASHINGTON — The Obama administration plans to move quickly to tighten the
nation’s financial regulatory system.
Stephen Crowley/The New York Times
“Our regulatory system failed to adapt to the emergence of new risks,” wrote
Timothy F. Geithner, Treasury secretary nominee.
Officials say they will make wide-ranging changes, including stricter federal
rules for hedge funds, credit rating agencies and mortgage brokers, and greater
oversight of the complex financial instruments that contributed to the economic
crisis.
Broad new outlines of the administration’s agenda have begun to emerge in
recent interviews with officials, in confirmation proceedings of senior
appointees and in a recent report by an international committee led by Paul A.
Volcker, a senior member of President Obama’s economic team.
A theme of that report, that many major companies and financial instruments now
mostly unsupervised must be swept back under a larger regulatory umbrella, has
been embraced as a guiding principle by the administration, officials said.
Some of these actions will require legislation, while others should be
achievable through regulations adopted by several federal agencies.
Officials said they want rules to eliminate conflicts of interest at credit
rating agencies that gave top investment grades to the exotic and ultimately
shaky financial instruments that have been a source of market turmoil. The core
problem, they said, is that the agencies are paid by companies to help them
structure financial instruments, which the agencies then grade.
“Until we deal with the compensation model, we’re not going to deal with the
conflict of interest, and people are not going to have confidence that the
ratings are worth relying on, worth the paper they’re printed on,” Mary L.
Schapiro, who testified earlier this month before being confirmed by the Senate
to head the Securities and Exchange Commission.
Timothy F. Geithner, the nominee for Treasury secretary, made similar comments
in written and oral testimony before the Senate Finance Committee.
Aides said they would propose new federal standards for mortgage brokers who
issued many unsuitable loans and are largely regulated by state officials. They
are considering proposals to have the S.E.C. become more involved in
supervising the underwriting standards of securities that are backed by
mortgages.
The administration is also preparing to require that derivatives like credit
default swaps, a type of insurance against loan defaults that were at the
center of the financial meltdown last year, be traded through a central
clearinghouse and possibly on one or more exchanges. That would make it
significantly easier for regulators to supervise their use.
Officials said that the proposals were aimed at the core regulatory problems
and gaps that have been highlighted by the market crisis. They include lax
government oversight of financial institutions and lenders, poor risk
management efforts by banks and other financial companies, the creation of
exotic financial instruments that were not adequately supported by their
issuing companies, and risky and ill-considered borrowing habits of many
homeowners whose homes are now worth significantly less than their mortgages.
“I believe that our regulatory system failed to adapt to the emergence of new
risks,” Mr. Geithner said in a written response to questions that was made
public on Friday by Senator Carl Levin, Democrat of Michigan. “The current
financial crisis has exposed a number of serious deficiencies in our federal
regulatory system.”
The regulatory changes are a major piece of a broader package being prepared by
the new administration to address the market crisis. Another piece to be issued
soon will provide the strategy for how the government will go about repairing
the declining banking industry. Congress recently approved the second $350
billion in spending from the Troubled Assets Relief Program.
The White House has come under increasing political and market pressure to
disclose how it intends to manage the program, and there is nervous expectation
on Capitol Hill that the administration will need to spend more than $350
billion. That plan is expected to focus on reducing foreclosures, revising the
bank bailout program, and buying or issuing guarantees for the rapidly
deteriorating assets that have been discouraging more private investment in the
banks.
Senior aides have vowed to move quickly on the administration’s financial
regulatory agenda. The Emergency Economic Stabilization Act, approved last
fall, requires the White House to make regulatory recommendations to Congress
by April 30, although the administration is preparing to make legislative and
regulatory proposals sooner.
Mr. Obama is expected to make one of his first foreign trips to a summit of the
leaders of the Group of 20 nations in London on April 2, and officials said the
administration will have outlined the details of its proposed regulatory
overhaul by then.
Officials have been grappling for nearly a year to figure out how to better
oversee the financial system, particularly as a number of large and
inadequately supervised companies have encountered problems. In a sweeping
regulatory blueprint unveiled last March, Treasury Secretary Henry M. Paulson
Jr. proposed a broad consolidation of banking and financial agencies, including
merging the Securities and Exchange Commission and the Commodity Futures
Trading Commission. That proposal is not included in the current plans.
Other elements of the regulatory overhaul, such as the requirement that hedge
funds register with and be more closely supervised by the S.E.C., would mark a
sharp departure from the policies of the Bush administration. Many hedge funds
now voluntarily register and subject themselves to some regulation, but the
Bush administration opposed attempts to make registration and tighter oversight
mandatory, even though that was proposed by William H. Donaldson, a chairman of
the commission appointed by President George W. Bush.
But other proposals the Obama administration is preparing to make, like tighter
federal regulation of mortgage brokers, had been recommended in Mr. Paulson’s
blueprint.
Officials said some credit default swaps with unique characteristics negotiated
between companies might not be able to trade on exchanges or through
clearinghouses. But standardized or uniform ones could.
“We want to make sure that the standardized part of those markets move into a
central clearinghouse and onto exchanges as quickly as possible,” Mr. Geithner
testified. “I think that’s really important for the system. It will help reduce
risk and the system as a whole.”
The new trading procedures for derivatives could also enable regulators to
impose capital and collateral requirements on companies that issue credit
default swaps that would make them safer investments. American International
Group, one of the largest issuer of such swaps, never had to post collateral
and nearly collapsed as a result of issuing a huge volume of such instruments
that it was unable to support.
Officials said the plan may include a broader role for the Federal Reserve in
protecting the economy from companies whose troubles pose systemwide risks, as
the report issued under the leadership of Mr. Volcker, a former Fed chairman,
has proposed. The report was issued this month by a subcommittee of the Group
of 30, a not-for-profit body of senior representatives from various governments
and the private sector. The group’s members include Mr. Geithner and Lawrence
H. Summers, the director of the White House National Economic Council.
Administration officials have begun to study ways to control executive
compensation.
For example, they are preparing proposals to limit executive pay at companies
that receive money under the bank bailout program. In response to written
questions by Senator John Kerry, Democrat of Massachusetts, Mr. Geithner said
that in such circumstances the administration was planning to set a limit and
that any compensation over that amount would “be paid in restricted stock or
similar form that cannot be liquidated or sold until government assistance has
been repaid.”
“Excessive executive compensation that provides inappropriate incentives,” Mr.
Geithner said, “has played a role in exacerbating the financial crisis.”
http://www.nytimes.com/2009/01/25/us/politics/25regulate.html?_r=1&ref=politics
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