Obama Proposes Financial Regulatory Overhaul, Create New Oversight Council

June 17, 2009— -- In a move spurring controversy and criticism, President Barack Obama today proposed the biggest financial regulatory overhaul since the Great Depression, recommending new executive powers and a new government regulatory agency.

Obama said that the nation's economic problems were tied to a "cascade of mistakes and missed opportunities" and called for a new foundation that would house "strong, vibrant financial markets" to protect the nation from another breakdown.

"It is an indisputable fact that one of the most significant contributors to our economic downturn was a unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess," the president said. "A culture of irresponsibility took root from Wall Street to Washington to Main Street."

Obama said the measures his administration is proposing would prevent another economic crisis.

"We did not choose how this crisis began, but we do have a choice in the legacy this crisis leaves behind. So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression," Obama said, adding that the goal is to "restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed; in which honest, vigorous competition is the system -- in the system is prized, and those who game the system are thwarted."

The president addressed critics on both sides of the political aisle -- those who say that the administration's plan does not go far enough and those who say the plan goes too far.

"There are those who will say that we do not go far enough, that we should have scrapped the system altogether and started all over again. I think that would be a mistake. Instead, we've crafted reforms to pinpoint the structural weaknesses that allowed for this crisis and to make sure that these problems are dealt with so that we're preventing crises in the future," Obama said.

To his critics, he added, "There are also those who say that we are going too far. But the events of the past few years offer ample testimony for the need to make significant changes. The absence of a working regulatory regime over many parts of the financial system -- and over the system as a whole -- led us to near catastrophe. We shouldn't forget that."

Indirectly responding to critics who say such moves will step on the free market system that defines the U.S. economy, the president said the government's role will only be as an overseer.

"I've always been a strong believer in the power of the free market. It has been, and will remain, the engine of America's progress, the source of prosperity that's unrivaled in history," Obama said. "With the reforms we're proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. … We don't want to stifle innovation. But I'm convinced that by setting out clear rules of the road and ensuring transparency and fair dealing, we will actually promote a more vibrant market."

The president said this proposal was drawn from his conversations with regulators, consumer advocates, business leaders, academic experts and the broader public.

"We did not choose how this crisis began, but we do have a choice in the legacy this crisis leaves behind," he said.

There are five key parts to the proposed overhaul, which the administration hopes Congress will pass this year.

First, the administration is calling for the creation of a new Financial Services Oversight Council. Headed by Treasury Secretary Tim Geithner, it would help fill gaps in supervision and identify emerging risks, and also implement stricter capital requirements across the board.

As part of this, the already-powerful Federal Reserve would gain additional authority to serve as the consolidated supervisor at the holding company level of all large, inter-connected financial firms that could pose a systemic risk to the overall system, institutions that would be subject to stricter capital requirements. A new national bank supervisor would conduct prudential supervision and regulation of all federally chartered depository institutions, and the Office of Thrift Supervision would be shuttered to "close loopholes that have allowed important institutions to cherry pick among banking rules."

Second, the government would have expanded powers that would allow it to take over financial firms before they collapse. The administration wants regulation of over-the-counter derivatives such as credit-default swaps, the registration of hedge funds and other private pools of capital, as well as improvements in the regulation of money-market mutual funds.

The administration would impose stricter reporting requirements on issuers' mortgage securities, insist that the originators maintain a long-term financial interest in them and demand new rules for credit-rating agencies evaluating the securities. The Securities and Exchange Commission would take on a larger role in requiring disclosures.

Third, a brand new regulatory commission called the Consumer Financial Protection Agency would be created to help protect consumers dealing with home mortgages, credit cards, student loans and home loans. It would also have the power to crack down on securities markets.

"Consumers will be provided information that is simple, transparent and accurate. You'll be able to compare products and see what's best for you," the president told Americans. "The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out, those things will be a thing of the past. And -- and enforcement will be the rule, not the exception."

Fourth, the Obama administration wants more power and tools to effectively manage financial crises in the future, a la AIG. The key part of this is giving the government the resolution authority -- similar to the Federal Deposit Insurance Corp.'s handling of failing banks -- to wind down large, failing companies so that they never again are faced with the "bad choices" of either providing emergency bailout money or allowing a potentially devastating financial collapse.

Lastly, the administration will seek similar regulations globally. "We need to level up the playing field globally so there is fair competition based on high standards, not a race to the bottom," a government official said.

"The key thing to say is the status quo is not an option," Christina Romer, chairwoman of Obama's Council of Economic Advisers, said on "Good Morning America" today. "One of the things we've seen from the crisis ... is that there were gaps, there were failures in our regulatory system, and we need to make it better."