Sure enough, the same industry forces that have protected the status
quo of turf-conscious federal agencies and regulatory loopholes were
trying to radically alter key provisions even before Obama stepped to
the dais.
But although conventional wisdom mandates a discounting of the
chance for Obama's financial reform, Obama, Treasury Secretary Timothy
Geithner, National Economic Council Director Larry Summers and the
other authors of the proposed regulatory overhaul appear anything but
resigned to failure. They act like this thing has a shot.
Outside the administration, few are ready to bet that Obama will
achieve quick passage with the entire package intact. But they aren't
dismissing chances that major portions could be enacted in fairly short
order.
Indeed, even past defenders of the status quo acknowledge the
recession was brought on by regulatory failings and industry
recklessness and an overhaul is necessary. "Regulatory reform is badly
needed and that Congress should move this year to adopt such reforms,"
said American Bankers Association President Edward Yingling.
The Financial Services Roundtable, a trade group for the 100 largest
financial firms, urged Congress to pass corrective legislation by the
end of the year. "It is important to strengthen the system to protect
the consumer, the industry and the economy," said Steve Bartlett,
roundtable president.
Such endorsements are more than empty words, says David Katz, financial markets partner at Orrick, Herrington & Sutcliffe LLP.
The severity of the downturn and the possibility that things could get
worse will force Congress to make a serious attempt at passage. "What
would get this moving is fear of another crisis hitting while Congress
was letting a viable proposal die on the vine," Katz says.
Congress is already bogged down with healthcare reform and
climate-change legislation and its ability to move another
controversial bill would seemingly be nil. But chances for financial
overhaul could actually increase if those other bills stall, if only
because lawmakers will need something to work on.
And Congress can move big bills quickly if the pressure's on. Jim Wheeler, a Bryan Cave LLP
partner specializing in financial institutions and acquisitions, noted
that recent Congresses have enacted complicated Sarbanes-Oxley
accounting changes and the unprecedented $700 billion Troubled Asset
Relief Program when they had a crisis at their backs. Financial
overhaul could have similar momentum, he says.
Former Republican Rep. Michael Oxley of Ohio, a co-author of the
Sarbanes-Oxley law, said in a televised interview last week that
legislation is likely. Overall, the Obama plan "goes in the right
direction," he said, adding that it builds on a plan put forth in the
previous administration by then-Treasury Secretary Henry Paulson.
Oxley said it's too early to tell how much Republican support the
Obama plan will generate, but he wagered it will be enough to pass.
"Reformers have the wind at their backs ... at the end of the day
something will pass but not without plenty of infighting in between."
The centerpiece of the plan would seemingly generate enough
opposition to threaten the bill. Obama is calling for increased
oversight of systemic risk by a new council of regulators, with the
Federal Reserve Board exercising broad new powers. Many in Congress are
resisting the expansion of the Fed's powers. "That's going to be a
tussle between the administration and Congress," says Martin Baily,
senior fellow at the Brookings Institution. "Many in Congress would
like to see the Fed's powers reined in."
But realistic alternatives have not been forthcoming from the Fed's
opponents. In a briefing with reporters last week, Summers said
responsibility for acting on systemic concerns ultimately must rest
with one entity and the Fed is the only viable option. "Collective
responsibility is too often no responsibility," he said. "Those with a
different view should either justify collective responsibility or
suggest an alternative."
At a Senate Banking Committee hearing the next day, lawmakers
criticized the proposals for increased Federal Reserve authority but
none offered options beyond the unhelpful suggestion to "start from
scratch."
So confident is the administration in the Fed's ultimate coronation
that it suggested returning power the central bank lost a decade ago,
by restoring the ability to impose higher prudential requirements on or
restrict activities of national bank and thrift subsidiaries of
financial holding companies, authority stripped by the
Gramm-Leach-Bliley Act in 1999. "That authority is consistent and
necessary for putting the Fed more in charge of risk regulation," says
Robert Litan, another Brookings fellow. "They have to give the Fed all
the power it needs to carry out its new responsibilities."
Another proposal more controversial in theory than in practice would
be the elimination of the housing-focused thrift charter and the
regulator of thrifts. The move is derided by the ABA as one that
"needlessly rips apart" the Office of Thrift Supervision and eliminates
charter choice.
"Abolishing OTS is no real surprise," Bryan Cave's Wheeler says.
Following the collapse of Washington Mutual and IndyMac last year and
the takeover of Countrywide, there are no major thrift companies to
fight for the agency's survival, he says.
Summers says the charter must be eliminated to end a practice of
"regulatory arbitrage," which allows institutions to shop for a charter
that permits them to pit regulators against each other in search for
the most lenient oversight.
OTS is widely seen as having expanded far beyond its original
mission and beyond its capabilities, Wheeler says. "OTS has
historically been the regulator of local savings and loans. But some
grew into global financial centers and probably out of the reach of OTS
to properly regulate."
Given that bankers have persuaded Treasury not to pursue its larger
goal of consolidating all four federal banking regulators into a single
supervisor, eliminating the politically vulnerable OTS is an easy way
to accomplish some level of regulatory streamlining, Orrick's Katz
adds. "Because OTS has lost its biggest constituents, it doesn't have a
base any longer to fight the fight. I don't know who is going to pound
the table on its behalf."
Similarly, the Obama administration's refusal to merge the
Securities and Exchange Commission with the Commodity Futures Trading
Commission is another example of the up-front concessions that brighten
legislative chances for the entire package. Instead, the administration
has suggested that the SEC and CFTC jointly oversee financial
derivatives.
It is a timid approach that worries many observers. Cynthia Krus, a partner and co-head of the corporate practice group at Sutherland Asbill & Brennan LLP in Washington, says not including a merger of the agencies in the plan "gives pause."
Adds Krus, "If you're going to promote sweeping changes and let
something like this slide, it then becomes questionable what it is
you're willing to stand up for."
But a jurisdictional battle between the agencies and the separate
congressional committees that oversee them is more of a threat to the
whole package than disappointment over tepid regulatory streamlining,
says Fiona Philip, a partner with Howrey LLP and former
enforcement counsel to the chairman of the SEC. Combining the two
agencies would have been difficult at best, she says. "The political
reality is the administration doesn't want to deal with a turf war"
between the agencies or agriculture and financial services committees.
Another sought-after authority, enabling the government to seize and
wind-down failing nonbank financial firms without forcing them into
bankruptcy, is controversial because it would hand that power to the
Federal Deposit Insurance Corp., whose chairwoman, Sheila Bair, has
rocky relations with other regulators. Bankers also don't like the idea
of giving the FDIC a role in dealing with nonbanks on the grounds that
it will sully the image of safety and soundness that banks enjoy
because of FDIC deposit insurance.
But Summers argued the FDIC is a natural choice because of its
experience resolving failed banks. He said concerns about FDIC
expanding its power are overblown because a majority of the Fed
governors would have to approve any takeover of a nonbank financial
firm, and with the concurrence of the Treasury Department. "The FDIC
should play a central role, just as it does now," Summers said. "We are
building on the current FDIC responsibility for manning the resolution
process."
Controversy over Obama's plan will be dampened because it
essentially implements separate suggestions offered in January by the
Government Accountability Office and by the Group of 30, an
organization of private sector experts and academics. Former Fed
Chairman Paul Volcker chaired the committee that wrote the G-30's
report on financial restructuring.
"A number of approaches that the steering committee recommended are
in the president's plan," says Mark Walker, managing partner of Cleary Gottlieb Steen & Hamilton LLP, who served as an adviser to the G30 committee that prepared the report.
Also certain to make some waves is the recommendation that
accounting standard-setters make more progress in agreeing on a single
set of accounting standards by the end of the year and iron out
differences over fair value accounting. Accounting for so-called toxic
assets with their ambiguous values and firms' exposure to them are at
the heart of the financial crisis. They still plague balance sheets,
and will continue to do so until a solution is reached. Banks have
bristled at reforming accounting standards, saying that each balance
sheet is different, as are lending standards, asset mix and regional
exposure.
But again, the administration's plan didn't come out of the blue. It
builds on recommendations issued at a recent summit of the Group of 20
world leaders. It recommends that the accounting standard-setters, the
Financial Accounting Standards Board and the International Accounting
Standards Board, along with the SEC, "clarify and make consistent the
application of fair value accounting standards, including the
impairment of financial instruments, by the end of 2009."
There will also be a battle over the president's plan to establish a
consumer protection agency for financial products. The entire notion is
opposed by bankers but the administration is insistent that banking
agencies failed to protect borrowers from inappropriate products such
as subprime loans. Geithner stressed that the agency will have
authority over instruments in which consumers are taking credit
exposure and would not overmeddle in investment and savings products.
Senate Banking Committee Christopher Dodd, D-Conn., insisted last
week that protecting consumers against dangerous financial products is
"a first priority." The senator also lashed out at financial firms
opposing a new agency, saying they do it at their own risk.
"The very people who created the damn mess are the ones" now saying
they will oppose sensible changes, Dodd declared at a June 18 hearing
on the overhaul plan.
But a lot of details need to be worked out before the industry's
concerns are allayed. Most importantly will be the exposure to
additional regulation by state officials, says Baily. The current
proposal stresses that the consumer protection agency's rules are meant
to be minimum standards and state regulators are free to impose
stricter ones. "There are no limits on the states," he says, warning
that financial institutions that are in compliance with federal law
could nevertheless be vulnerable to a "crusading attorney general."
The fight over consumer protection is brewing to the biggest one in
the reform plan. But unlike many of Obama's other reform proposals,
details of the consumer protection agency were never floated in a trial
balloon. Last week's announcement was the trial balloon. If the
administration is as willing to bend on consumer protection as it has
been on other controversial measures, the new agency -- and the overall
reform itself -- might become reality.
President Obama's financial overhaul plan wouldn't get great odds from Las Vegas bookmakers. Even the president himself has cast his sweeping revamp of bank and other financial firm oversight as a dark horse. 
