Battles Over Reform Plan Lie Ahead

“Our system failed in fundamental ways,” Mr. Geithner told the House Financial Services Committee. “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.”



March 27, 2009
Battles Over Reform Plan Lie Ahead
By EDMUND L. ANDREWS

WASHINGTON — Outlining a far-reaching proposal on Thursday to rebuild the nation’s broken system of financial regulation, the Treasury secretary, Timothy F. Geithner, fired the opening salvo in what is likely to be a marathon battle.

“Our system failed in fundamental ways,” Mr. Geithner told the House Financial Services Committee. “To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.”

On the surface, both the lawmakers who listened to the Treasury secretary and the financial industry’s lobbying groups made it sound as if they completely agreed with Mr. Geithner’s call for what he described as “better, smarter tougher regulation.”

But in fact industry groups are already mobilizing to block restrictions they oppose and win new protections they have wanted for years. Even though Mr. Geithner carefully avoided specific details, laying out mostly broad principles for overhauling the system, financial industry groups are identifying issues they plan to pursue and lining up well-connected lobbyists and publicists to help make their cases.

If history is any guide, Mr. Geithner’s proposals will start an equally intense battle among the regulatory agencies themselves — including the alphabet soup of banking regulators, the Securities and Exchange Commission and the Federal Reserve — to stay in business and enhance their authority.

It took years to complete past efforts to overhaul regulation of the financial industry — replacing the Depression-era laws that separated commercial banks from investment banks, for example, and knocking down barriers between the telephone and cable television industries.

And those efforts were in some ways easier than the task confronting President Obama and Congress today. Many of the past overhauls were really about deregulation, knocking down legal barriers that had prevented different segments of an industry from competing with each other.

By contrast, Mr. Geithner’s plan marks the first attempt in decades to drastically tighten the restrictions on industry. It would create a new still-unidentified “systemic risk regulator” that would have the authority to scrutinize and second-guess the operations of bank holding companies like Citigroup or JPMorgan Chase, insurance conglomerates like the American International Group and other financial institutions that are deemed too big to fail.

Hedge funds and private equity funds, which have been almost entirely unregulated, would have to register with the S.E.C. and tell it about their risk-management practices. Many financial derivative instruments, like credit-default swaps, would come under supervision for the first time.

Mr. Geithner’s most specific proposal, which Democratic lawmakers hope to pass in the next few weeks, would allow the federal government to seize control of troubled institutions whose collapse or bankruptcy might jeopardize the broader financial system.

In the months ahead, Mr. Geithner said, he will unveil more detailed proposals to set up a new regime for tighter regulation of most segments of the financial services industry. He has also said the government should more actively regulate executive compensation, not just at companies that are receiving federal bailout money, but at all companies that might be providing incentives for excessive risk-taking.

“The days of light-touch regulation are over,” said Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee.

Mr. Frank said the financial and economic catastrophes of the last 18 months had created a new political consensus in favor of tighter financial supervision. Mr. Frank said he hoped to pass a bill “very soon” to give the federal government “resolution authority” to seize control, restructure and shut down troubled financial institutions.

And he said he hoped to pass a much broader bill along the lines of Mr. Geithner’s plan by the end of this summer.

But administration officials acknowledged that enacting broad financial reforms would provoke political battles that are almost certain to drag on for months, if not years.

President Obama and his economic team are already trying to navigate between the deep popular anger over reckless financial practices and the pragmatic need to coax support from the financial industry for regulations they almost reflexively oppose.

On Friday, Mr. Obama will meet with executives from the nation’s biggest financial institutions. Bank executives said they expected Mr. Obama to try to sell them on his ideas, and perhaps to encourage them to keep participating in the Treasury Department’s Troubled Asset Relief Program, or TARP. Goldman Sachs has signaled that it wants to return the government’s money that the Treasury loaned it under that program.

On Thursday, most industry lobbying groups held their fire and reacted to Mr. Geithner’s proposals as if they agreed with him entirely.

The Securities Industry and Financial Markets Association said on Thursday that it “has been advocating for many of the same reforms” and that it “looks forward” to developing specific legislation.

The Private Equity Council, which represents firms like Kohlberg Kravis Roberts and the Carlyle Group, praised the Obama administration for its “plan to comprehensively address systemic risk.” The American Insurance Association declared that “we agree with Secretary Geithner” that the new rules should “encourage high standards and a race to the top.”

But industry lobbying groups are pushing their own agenda. Edward L. Yingling, president of the American Bankers Association, said he hoped to use the meeting with Mr. Obama to make the case for relaxing mark-to-market rules, which require financial institutions to value their investment securities at current market prices. Banks have argued that the rules are hurting their financial positions.

Many insurance companies, for their part, are hoping to free themselves from the oversight of 50 separate state insurance regulators. Lobbyists for the retailing and restaurant industry, meanwhile, are hoping to use the banner of financial reform to persuade Congress help reduce the fees that credit card companies charge for processing customer transactions.

Edmund L. Andrews reported from Washington, and Louise Story from New York. David Stout contributed reporting from Washington, and Michael de la Merced and Zachery Kouwe from New York.