June 16, 2009 -- President Barack Obama is poised Wednesday to outline the biggest financial regulatory overhaul since the Great Depression, part of sweeping measures by the administration to prevent a future economic crisis as severe as the current one.
"The broad principle is that a lack of oversight, a series of regulatory gaps, allowed financial institutions -- not just banks, but non-bank institutions -- to engage in wild risk-taking that didn't simply imperil those institutions, but imperiled the United States' economy and had a profound recessionary effect on the world economy," Obama said Tuesday at the White House.
"We are going to put forward a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again," he said. "We expect that Congress will work swiftly to get these laws in place. I want to sign them and we want to get them up and running."
Already drawing barbs from a range of skeptics, the proposals will include the creation of a Consumer Financial Protection Agency to look out for consumers' rights and a comprehensive crackdown on securities markets.
The administration's proposals also call for a council, to be chaired by the Federal Reserve, to monitor systemic risks to the economy; authority for the government to wind down large, failing firms; increased regulation of securities and derivatives markets and more oversight of global financial firms.
As part of these plans, the administration will call for the creation of the Financial Services Oversight Council, to be chaired by the Treasury Department, to help fill gaps in supervision and identify emerging risks. Stricter capital requirements will be implemented across the board.
The administration will also get rid of the Office of Thrift Supervision and create a new national Bank Supervisor to oversee federally chartered depository institutions.
Increased regulation is a key part of the new plan. The administration wants regulation of over-the-counter derivatives, like 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.
Crackdown on Mortgage Securities
Trying to crack down on problems in the past with mortgage-backed securities, the administration will impose stricter reporting requirements on the issuers of these 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.
Under the proposal, the Securities and Exchange Commission would take on a larger role in requiring disclosures. Credit rating agencies would also have to disclose conflicts of interest.
In light of the AIG debacle, the administration wants to give the government the tools to effectively manage financial crises in the future. A central element in this effort is giving the government power 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 -- similar to how the FDIC can currently handle failing banks. But before it ever gets to that point for these firms, the administration wants to reduce the impact of failure by implementing more stringent capital standards among large firms and requiring prompt, corrective action if these capital levels decline.
The president will announce the plans at an East Room event at 12:50 p.m. ET Wednesday.
Even before all these measures have been unveiled, critics on Capitol Hill are already voicing their opposition. Many of the proposals will need to be passed by Congress.
"If the administration gets the wrong diagnosis, they're going to get the wrong remedy," said Rep. Jeb Hensarling, R-Texas, a member of the Congressional Oversight Panel. "The administration got the wrong diagnosis. They blame everything on de-regulation. It's not a matter of de-regulation. It's a matter of dumb regulation. And so, what the administration has essentially done is left the regulatory infrastructure and most of the regulation in place and then they add on to it. It's kind of like taking rotted wood and putting a fresh coat of paint on it -- to some extent, it doesn't solve the problem and it can make it worse by hiding flaws that lie underneath."
'When Elephants Dance, Grass Gets Trampled'
Rep. Scott Garrett, R-N.J., a member of the House Financial Services committee, said the administration's rush to financial regulatory reform was "too much, too soon" and lacked a "coherent overall strategy."
"When the administration continues to meddle and continues to have new proposals and new solutions even before they have a consensus on what the problem was, there is a lack of confidence and trust on Wall Street and Main Street that the administration knows what the heck it's doing," Garrett said. "And in the meantime, both Wall Street and Main Street is going to sit on the sidelines and not invest, you're going to see unemployment go up just because they don't have confidence in the administration that they have the right plan."
Even Democrats expressed doubts about the Fed council. Sen. Mark Warner, D-Va., used an old African proverb to argue that more power for the Fed was not the solution to systemic risk problems.
"When elephants dance, the grass gets trampled," he said Tuesday. "Well ... we've got a trampled grass problem at this point. And I don't think we can solve it with bigger elephants, whether those bigger elephants are regulators or institutions."
On Thursday, Treasury Secretary Tim Geithner will make his case to lawmakers when he goes to Capitol Hill to testify before the Senate Banking Committee and the House Financial Services Committee.
"Like all financial crises, the current crisis is a crisis of confidence and trust," Geithner and National Economic Council director Larry Summers wrote in the Washington Post Monday. "Reassuring the American people that our financial system will be better controlled is critical to our economic recovery."
"Our goal is to get it done this year," a senior administration official said Tuesday.
But it will be a tough task for the administration to get these plans through Congress, with dissent coming not only from Capitol Hill, but also from vocal industry opposition.
The U.S. Chamber of Commerce acknowledged the need for reforms, but expressed concern over whether the administration and Congress would come up with plans that would strike the right balance.
Chamber Weighs In
"We need to overhaul the system," said David Hirschmann, CEO for capital markets competitiveness at the chamber. "We hope the administration has not listened to those who only want to tinker at the edges. We believe it is the best for our long-term recovery to emerge from this crisis with a comprehensive overhaul and modernization of the regulatory system. If not now, then when Congress should take the necessary time to get it right rather than to move quickly in a piecemeal fashion that will only magnify the weaknesses of the current structure, add band-aids and new layers of regulation to a broken system."
Gerard Cassidy of RBC Capital cautioned that investors and bankers should brace themselves for "very harsh and strict regulations" from Washington. He worries that "an overactive and over-interventionist government could really stifle economic growth."
ABC News' Charlie Herman, Zunaira Zaki, and Sunlen Miller contributed to this report.