Report card: Obama's plan to fix financial rules
The President's new plan has some good ideas, but also a few troubling developments. Now it's Congress's turn.
NEW YORK (Fortune) -- Now that President Obama has presented his plan to fix the way the U.S. regulates finance, it's time to assess if the plan will work. The 85-page "white paper" his Treasury Department released lays out the specifics. Now Congress will begin its ugly process of turning the proposals into law. There are some good ideas here. There's also a whole lot that may make Wall Street howl in protest.
Here, then, are some preliminary grades on a preliminary plan. The final exam is a long way off.
Give government power to wind down systemically important players. This is a good idea, if the manner in which this purportedly rare power is to be exercised is clearly spelled out to the affected companies. Last year there was considerable debate about whether the federal government had the authority to seize Lehman, an investment bank not regulated by the FDIC, instead of allowing it to collapse. These powers should be written down to avoid the embarrassing position the Bush and Obama administrations have found themselves in in the last year, exercising power that may or may not exist. (Grade: B+)
Empower the Fed to oversee the biggest financial players, including imposing leverage restrictions (and liquidity and capital requirements) on the largest financial companies. This arguably is the only proposal that means anything at all. Limiting the use of leverage at institutions like Citigroup (C, Fortune 500) or AIG (AIG, Fortune 500) would have made all the difference in 2008. Then again, the same action would have eroded years of profits at Goldman Sachs (GS, Fortune 500). A leverage restriction for banks and nonbanks alike would go a long way to preventing another crisis. Exactly how the requirements are written, including if they are transparent to investors, will mean everything. (Grade: Incomplete. Too soon to know.)
Create a super-regulator for consumer-oriented financial products, including mortgages and credit cards. It sounds good, but adding another regulator rather than eliminating them is a troubling development. (Grade: C)
Eliminate the Office of Thrift Supervision. Oh, actually, Obama does plan to do away with one ineffectual agency. What's not to like about eliminating the regulator that oversaw AIG, Countrywide and WaMu? The total number of regulators will stay the same. There should be more, not less, of this, but Beltway types say the White House doesn't want to risk political fights with Congressional committee chairmen whose turf includes agencies that should go away. This isn't change we can believe in, suffice it to say. (Grade: A on the specific action; D on the larger message.)
Urge harmonization between the SEC and CFTC. It's an open secret that the securities regulator and futures regulator step on each other's toes. A March 2008 blueprint by former Treasury Secretary Hank Paulson suggested the agencies should be merged. That plan went nowhere. "Harmonization" is Washingtonspeak for "nothing will happen." It's sort of like forming a blue-ribbon commission. (Grade: F)
Require hedge funds to register; regulate derivatives. Registration of hedge funds is harmless, and bringing the unregulated products they trade into the tent is a good idea. But this regulation should be constructive, not punitive. Plenty of laws against manipulation and abuse already exist. What we shouldn't be doing is going after "speculators," also known as investors. It's a slippery slope. (Grade: C-)
Reduce reliance on ratings agencies and require the originator, sponsor or broker of securitized mortgages to retain a financial interest in loans. Whoa. This is a bombshell. Diminishing the role of the agencies will be a fun one to watch. Requiring mortgaging originators to hold a portion of their loans will annoy the banks. This will be a bloody debate. (Grade: B-)
Create a council of regulators to monitor systemic risk. This sounds like a Washington problem waiting to happen. A council could be helpful because its members will be powerful and motivated to spot problems. But it will be a political body in a political town. You'd have to see it in action to know if it works. (Grade: Incomplete.)
Treasury Secretary Tim Geithner and Larry Summers, the president's chief economist, concluded an opinion piece in The Washington Post earlier in the week by writing: "Now is the time to act." Actually, March 2008, when Paulson suggested his blueprint, would have been a really good time to act. Now would be good too.