Obama unveils US financial regulatory overhaul (2nd Roundup)

By Chris Cermak Jun 17, 2009, 17:54 GMT

US President Barack Obama announces a regulatory reform plan aimed to modernize and protect the integrity of the US financial system, in the East Room of the White House in Washington DC, USA, 17 June 2009. President Obama said his plan to refashion supervision of the US financial system is needed to fix lapses in oversight and excessive risk taking that helped push the economy into recession. EPA/SHAWN THEW

Washington - President Barack Obama proposed massive changes Wednesday to how the United States regulates its financial industry, hoping to win new government powers that his administration believes could prevent another financial crisis from ever taking place.

Promising 'a transformation on a scale not seen since the reforms that followed the Great Depression' of the 1930s, Obama would vastly expand the authority of the Federal Reserve and create an 'oversight council' of regulators to watch over the entire US financial sector.

Obama hopes to extend government regulation to virtually all corners of Wall Street, including hedge funds and complex financial products like mortgage-backed securities, which share blame for the current financial crisis but have faced little or no regulation.

Obama hailed the overhaul as a way of discouraging investors from taking careless risks, and breaking the regular cycle of 'booms and busts' that have marked financial markets for decades. Yet it struck a 'careful balance' between free markets and government intervention.

Presenting the plan in an 89-page White Paper, the administration also hopes to set an example for other countries and 'take the lead' in pushing for consistent regulatory standards across the globe.

Obama spread the blame across banks, the government and ordinary Americans for causing the worst financial crisis - and longest recession - in the United States in 70 years.

'A culture of irresponsibility took root from Wall Street to Washington to Main Street,' Obama said at the White House.

'And a regulatory regime basically crafted in the wake of a 20th century economic crisis - the Great Depression - was overwhelmed by the speed, scope and sophistication of a 21st century global economy,' Obama said.

The overhaul, which must be approved by the US Congress, was met with a mix of caution and skepticism from businesses, the financial industry and politicians. Many were disappointed that Obama had axed plans to consolidate the government's patchwork of regulators.

'Overall, the proposal simply adds to the layering of the system without addressing the underlying and fundamental problems,' said David Hirschmann of the US Chamber of Commerce. 'We cant simply insert new regulatory agencies and hope that we've covered our bases.'

Obama's proposals would put the US central bank in charge of monitoring the country's biggest financial firms - those considered critical to the health of the system as a whole. Those companies will also face new, stiffer requirements on how much capital and liquidity they keep in reserve.

The Obama administration also wants unprecedented powers to step into large financial institutions that are facing imminent collapse, in order to force an orderly bankruptcy that would protect the wider economy.

Beginning with former president George W Bush, the US government has been forced to plug nearly 600 billion dollars into banks that were on the brink of collapse last October, after investment banking giant Lehman Brothers declared bankruptcy.

'We should not be forced to choose between allowing a company to fall into rapid and chaotic dissolution or to support the company with taxpayer money,' Obama said. 'That's an unacceptable choice.'

The plan will now move to Congress, which is already engaged in a heated debate and will hold its first hearing on the proposals with Treasury Secretary Timothy Geithner on Thursday.

Republicans, who are in the minority in both chambers of Congress, have already launched their own plan, rejecting the idea that the government should be involved in managing the country's largest financial institutions.

Obama also envisages a new consumer protection agency, with the power to clamp down on unfair or misleading practices by banks on everything from mortgage loans to credit cards. The administration hopes this can help stop US families from running up massive debts - another element of the current recession.

The collapse of many Wall Street firms was brought on by a record number of foreclosures by ordinary US homeowners, many of whom were mislead on the terms of their loans or offered mortgages they couldn't afford in the first place.

Wall Street cautiously welcomed most of Obama's proposals, though many are resisting the creation of a consumer protection agency.

'It is important to strengthen the system to protect the consumer, the industry and the economy,' said Steve Bartlett, president of the Financial Services Roundtable, Wall Street's main lobby group.

'The past two years have clearly demonstrated what happens when risk is not properly assessed in our industry,' read the statement.