Power plays will start after Obama announces new rules
The only thing that's certain right now is that the final result will be a major realignment of power and authority among government agencies that set the rules for banking, lending and investing, as well as for consumer transactions involving credit cards, mortgages and mutual funds. Consumers might actually end up with a strong regulatory force and their own regulatory agency that focuses on their needs. The recent mortgage crisis partly evolved because no one was watching the backs of consumers and many types of exotic mortgages were allowed to flourish without proper scrutiny.
The Obama administration is focusing on four key weaknesses in the current system:
1. The need for a federal entity that detects institutions in trouble that could threaten the stability of the financial system (such as Lehman Brothers or AIG), and enables the government to step in and unwind large institutions before they choke the system. The FDIC does this for banks, but right now no agency exists for other major corporations.
2. The need to get better control of the capitalization of large financial institutions. The current crisis happened because too many banks were highly leveraged -- more debt than equity. Expect tougher capital, liquidity and leverage requirements with the new legislation.
3. The need to regulate large institutions such as hedge funds and big insurers. Expect new registration requirements for hedge funds by the SEC and the establishment of some federal overseer for insurance firms.
4. The need for a consumer watchdog. Expect to see a financial services consumer protection body with powers over mortgages, credit cards and other consumer products.
Turf wars in Congress already prevented the consolidation of the SEC and CFTC, so expect other turf wars to scuttle some proposals. Senator Chuck Schumer of New York wanted a single bank regulator but in the interest of sidestepping some bruising battles that idea appears dead. Officials do hope to fix gaps in the current regulatory structure and remove opportunities for shopping around for the regulator with the lightest touch.
While there won't be one banking regulator, the plan does call for the Federal Reserve to oversee financial institutions, products or practices that pose a systemic risk to the economy. A "council" of regulators will be established to monitor this. The Fed will also get new powers to scour the books of a wide range of firms. It's not yet known exactly what the Fed's enforcement powers will be. That will likely be decided during the power plays in Congress.
Lawrence Summers, Director of the White House's National Economic Council, told the Council on Foreign Relations that "Any financial institution that is big enough, interconnected enough or risky enough that its distress necessitates government writing substantial checks, is big enough, risky enough or interconnected enough that it should be some part of the government's responsibility to supervise it on a comprehensive basis."
House Financial Services Committee Chairman Barney Frank expects to take up the measure soon and pass a bill by August. Then the Senate will take up the bill in the fall and complete it by the end of the year, according to Senate Banking Committee Chairman Christopher Dodd. So it will be many months before the final bill design is known.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and Trading for Dummies.