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Obama's New Road Rules May Fall Short

Let's start with the basics: It's a good thing that President Obama is proposing new regulations for the financial industry.

After five months spent untangling a massive pile-up in the financial industry and patching up the wounded, it's entirely appropriate -- necessary, really -- that he establish some new rules of the road. There's a lot to be learned -- and fixed -- based on what we've experienced lately.

And Obama's avowed goals are admirable -- among them to make consumer-level decisions more transparent, to plug gaps in the regulatory structure that were exposed by this crisis, to update rules to reflect new financial products, and to provide closer government supervision of institutions that we now realize are simply too big too fail.

Indeed, Obama is appropriately perplexed by some of the squawking coming from the financial sector.

"You know, I think that Wall Street seems to maybe have a shorter memory about how close we were to the abyss than I would have expected," Obama told Bloomberg's Al Hunt yesterday:

"When I hear some of the commentary that's been creeping up about, 'You know, it's time for government to get out of the economy' and 'What's the Obama administration doing?' I have to try to remind them — all we're doing is cleaning up after the mess that was made....

"[W]hat I do think everybody should understand is that we now need some sensible rules of the road so that people aren't taking exorbitant risks that pose system-wide risks to the financial system; that, when it comes to issues like executive compensation, shareholders should know what management is - is giving themselves so that, you know, their interests are properly aligned.

"We think that it makes sense for consumers to know what they're getting into when they sign up for a credit card or a subprime loan, that credit agencies aren't self-interested when they're rating securitized products.

"So there are just a bunch of commonsense reforms that I think we can make. And as soon as we get those in place, I am eager to make sure that we can refocus our attention on long-term challenges, like improving our school system or our health care system, that should be the subject of - of - of my administration's attention."

But despite the complaints emerging from the big-money crowd, the evidence suggests that Obama has undershot rather than overshot with his regulatory overhaul.

What we've learned in the past is that, when it comes to the world of finance, sometimes you get populist Obama and sometimes -- let's be real, more often -- you get pushover Obama.

Consider that, as Stephen Labaton writes in the New York Times:

President Obama’s plan to reshape financial regulation, which he will unveil on Wednesday, is the product of weeks of meetings among government officials, financial experts, lawmakers, industry executives and lobbyists, many of whom were invited to help the White House draft the proposal.

As a result, he writes:

Although it would strikingly reorganize the regulatory architecture, the president’s plan results from many compromises with industry executives and lawmakers, and is not as bold as some had hoped.

Or, as Obama said in an interview on CNBC with John Harwood yesterday:

Did, you know, any considerations of sort of politics play into it? We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don't want to tilt at windmills, we want to make sure that we're getting the best possible regulatory framework in place so that we're not repeating the mistakes of the past.

(And don't miss the video of Obama killing a fly with his bare hands during the Harwood interview.)

Obama also sat down for an interview with Gerald F. Seib, who writes in the Wall Street Journal that the president wanted to make it clear that he aspires to a "light touch" -- not heavy-handed meddling.

Mr. Obama went to great pains to explain that there is a philosophy behind the changes he is about to propose to the nation's financial plumbing. Indeed, he says, it is the same philosophy that applies to his broader view of the government's role in the economy.

What would have the biggest impact on the average American? Kevin G. Hall and Tony Pugh write for McClatchy Newspapers:

Among the sweeping changes in government regulation that President Barack Obama will propose Wednesday is the creation of an independent and powerful Consumer Financial Product Safety Commission to regulate financial products such as mortgages and credit cards.

With an eye toward protecting consumers and ordinary investors, the Federal Reserve and other bank regulators would lose their oversight over mortgages, credit cards and other financial products that are sold to consumers. It's a radical shift in approach and a tacit acknowledgment of federal failure.

"Lets face it, the (Federal Reserve Board) has had the power to engage in aggressive consumer regulation at least since 1994," Harvard law professor Elizabeth Warren, who chairs the Congressional Oversight Panel, which oversees how Wall Street bailout money is being spent, told McClatchy in an interview. "They clearly had the power to stop the mortgage crisis before it started. And what did they do with that power? Nothing."

Binyamin Appelbaum and David Cho write for The Washington Post:

Many of the specific proposals will require legislation, and today's announcement will drop the plan into an already heated debate on Capitol Hill about the eventual shape of reform. The financial crisis has forced broad consensus that changes are necessary, but there are wide disagreements about the details.

Here is the text of Obama's remarks as prepared for delivery, the White House's 85-page white paper, and a whole slew of "fact sheets".

From Obama's remarks:

"Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and the failure of their government to provide adequate oversight. Our entire economy has been undermined by that failure.

"The question is, what do we do now? 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."

With some early reactions, Felix Salmon blogs for Reuters:

If you thought this was going to make the current horribly-complicated system of financial regulation less complicated, think again.

But Justin Fox blogs for Time that the consumer-oriented commission is a good idea:

We already have lots of regulations that decide how people get to live financially. It's just that right now they're all administered and in some cases written by agencies also charged with making sure banks are profitable. Guess what—protecting consumers and keeping banks profitable don't always go together. There's a lot to be said for separating the two tasks.

By Dan Froomkin  |  June 17, 2009; 1:05 PM ET
Categories:  Financial Crisis  
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Sounds good, but we need more. Turf wars in congress on what committees regulate what aspects of the financial system are getting in the way of streamlining the response to the financial challenges we face. We need fewer more powerful regulators that are accountable to congress and the executive branch. The current set of reforms is a good start, but doesn't eliminate the multiple regulatory structures that exist now. Companies should not be able to shop for the most lenient regulators and create a subsidiary to funnel risky activity there. This is what happened when AIG went into the derivatives business.

Posted by: srw3 | June 17, 2009 1:53 PM | Report abuse

As was pointed out by someone (Michael Lewis on Rachel Maddow?) last night, no one has said anything about the rating agencies, who made all of this possible by giving every piece of paper a AAA+ rating. The rating agencies are paid by the people whose paper they rate, just as the accountants are paid by the people whose books they rate. Until these groups are penalized for error, there won't be improvement in the financial industry.

Posted by: dickdata | June 17, 2009 2:04 PM | Report abuse

"sometimes you get populist Obama and sometimes -- let's be real, more often -- you get pushover Obama"

This is what I don't get about Obama. I understand that compromise is an essential part of running government, but where does he draw the line between taking input from people who created the crisis and excluding them?

My unrealistic but hopeful expectation of Obama was that he would be a progressive version of Bush - push through whatever the left wants and to hell with the opposition.

What I thought was my much more realistic expectation was that he would take the reins on a few priorities and push them through while allowing the rest to be subjected to compromise.

Instead what we got was a consummate compromise artist who seems to have very few convictions that he is willing to firmly stand behind. Why do Democratic politicians have this seemingly innate fear of championing their own ideology?

Posted by: BigTunaTim | June 17, 2009 2:38 PM | Report abuse

What we are getting from the Obama administration is not what we the people expected, but it seems that those rich and powerful are getting what they demand from Obama. Sorry to state this, but the Obama administration is a continuation of the cheney/bush mis-administration. In trying to repair the damage the pseudo republicans did to the USA, economically, politically, and diplomatically, Obama has reduced himself to just another puppet--just like bush.

Posted by: ghostcommander1 | June 17, 2009 2:47 PM | Report abuse

I want to read a story from froomkin about froomkin just having lost his pension and any other securities he may have leaving him with just his salary...

Posted by: DwightCollins | June 17, 2009 3:02 PM | Report abuse

The big O has an eight year plan to destroy the neoliberal economic model and the neoconservative governance model, just as candidate O had a two year plan to destroy the neoliberal HRC and the neoconservative Republican party. He was pretty successful at the latter, don'tcha'think?
Patience, patience, patience.
Ph'nglui mglw'nafh C'thulhu R'lyeh wgah'nagl fhtagn!

Posted by: TheRoyalPant | June 17, 2009 3:10 PM | Report abuse

I think what is different about this President is that he is a committed incrementalist. Moving the scrum three yards at a time by undercutting opponent arguements with contained non inflamatory logic. The Republicans are only able to present slightly different options that in many ways validate his agenda. It appears implementation of his progressive agenda is based in evolution rather than revolution.

Posted by: lcarey | June 17, 2009 3:31 PM | Report abuse

The Wall Streeters don't really have a short memory. They remember quite clearly their sobriquet "Masters of the Universe", an ego-inflating title bestowed on them for making themselves filthy rich while doing nothing productive.

In fact much worse than merely being non-productive, their business was nothing more than stealing from millions of people in such a way that the theft would not be detected for some years, making it hard or impossible to trace back to the culprits, and completely impossible to recover.

The Wall Streeters are dying to get back to work stealing again, and any attempt to deny or even delay this makes them angry.

As they say, it's just business.

Posted by: careysub | June 17, 2009 3:47 PM | Report abuse

You want the world and you want it now, huh? We've got a President bringing in sweeping changes to the financial regulatory system within months of taking office. Yet he's a pushover? National governance does not run like a microwave oven, more like a crock pot or pressure cooker. But I know, you've got to write an article about something every day, so...

Posted by: MrInternational | June 17, 2009 3:51 PM | Report abuse

Don't underestimate the size of the problem Obama is trying to solve.

Estimated total amount that world financial institutions will write off by 2010 (according to the International Monetary Fund): $4,100,000,000,000.

Portion of those bad loans and securities that originated in the U.S.: 2/3rds.

(Source: Harper's Index)

Posted by: pali2600 | June 17, 2009 4:02 PM | Report abuse

Right on, mrinternational & pali2600. This is a gigantic set of problems Obama and his team are confronting--one which wasn't part of his original plans for an administration (until everything hit the fan last October). I recall, when the first bailout was announced, all the pundits complaining that Obama wasn't doing enough. Patience, he and Geithner said, This is just the first part of a multifaceted plan to rescue and reform the finance industry.

A mere four months later, longer-term regulations are on the table. I'm no economist (though I do read Krugman!), so I couldn't pretend to know what specific measures will likely do what. Krugman says, Make banking boring again: remove the adventure, and the risk-taking will remain manageable. He condemns the Reagan reforms for the mess we're in now. His main complaint is that the "skin in the game" component of the bill--that financiers retain a certain amount of liability for the products they sell--is too low: it should be at least 10% (not 5%). In other words: where it counts, the bill is too weak.

Maybe so...but I think, better to get a framework in place, and the details can be tweaked later (they always are).

Posted by: whizbang9a | June 17, 2009 4:29 PM | Report abuse

The real cause of all the problems?


Posted by: lunetrick | June 17, 2009 5:40 PM | Report abuse

An independent Consumer Financial Product Safety Commission is a laudable idea, but try moving beyond the idea to the reality of who can be trusted to perform this watchdog function. The fundamental problem with regulatory agencies in general is that, in order to have experience regulating a particular facet of economic policy (be it banking, private equity firms, complex financial instruments), the fox inevitably ends up guarding the henhouse.

The Harvard law professor that Dan quotes in today's column complains that the Federal Reserve Board has had the ability to "engage in aggressive consumer regulation" since the 1980s. In a sense, the Board has indirectly been engaged in that practice. Former chairman Alan Greenspan's answer to economic crisis consisted of lowering interest rates. When the companies tanked in 2000, low rates were the incentive for both financial institutions and individuals to shift money into the real estate market. We are all painfully aware of how that herd instinct dynamic turned out.

There is also the conundrum of re-shifting and redefinition of regulatory responsibility both within existing agencies and a new consumer oriented regulatory commission, to both avoiid overlapping responsibility, while ensuring that such agencies are effective in their redefined areas of responsibility.

As for the knock on Obama that he is alternatively, a progressive reformer and a pushover, well that's the nature of politics. One thing to bear in mind is that, if you bring all the interested parties under on tent, those parties at least cannot complain that their concerns were ignored (as Lyndon Johnson use to say in his signature salty manner, it's better to have special interests peeing out of the tent, rather than into it).

Icarey's opinion that Obama may be adopting an incrementalist approach is an interesting idea that deserves consideration; let's have patience and see if time validates that observation.

Posted by: MillPond2 | June 17, 2009 5:57 PM | Report abuse

I'm glad you all have faith that Obama has all the answers and can fix everything overnight. I, for one, do not. He has no resume for this type thing and clearly the folks in charge of implementing it (Congress) are even worse. Maybe this is a good idea but jamming down our throats in record time is not a good idea in these difficult recessionary times.

Posted by: mmourges | June 17, 2009 6:10 PM | Report abuse

If there are going to be new rules, then a stable recovery must be based on the new rules, not the old ones. Arguments that this is not the time to reform are aimed at one thing only: forestalling or limiting urgently needed reform.

When boards actually oversee CEOs instead of rubberstamping their every pipe dream, when rating agencies get to enjoy the rotten fruits of rating mistakes, when mutual funds begin to exercise their shareholders rights to protect their investments, the system may become safe for humans. What we've got now is a meat grinder with a diamond studded handle.

Posted by: fzdybel | June 17, 2009 6:28 PM | Report abuse

News alert : Several large banks are literally insolvent under current cap rules.

Now the name of the game is trying to keep it secret and thus "con in the capital". The mark-to-market change helped. Stress tests ( aka one minute on a slow treadmill ). More needs to be done.

Too bad those pesky toxic assets won't just go away. It's the wolf at the door....don't answer it...act like nobody's home.

More confidence building needs to be done. By any devious means necessary.

Tim, Larry and Barry are all up to the job.

Posted by: bandcyuk | June 17, 2009 6:29 PM | Report abuse

To mmourges: You stated that "you ALL (my emphasis) have faith that Obama has all the answers and can fix everything overnight". If you revisit my post, you will realize that my comments don't validate that statement. I share your reservations.

Posted by: MillPond2 | June 17, 2009 6:47 PM | Report abuse

The overall framework of what President Obama has proposed for regulating the financial industry is a definite improvement over the current toothless and loophole ridden regulations.

By the time Congress gets around to finishing rewriting the details, the question of what will emerge remains. Ideally, we should get a clear, streamlined and efficient set of regulations that permanently close AIG sized loopholes.

Only time will tell if this Administrations incrementally slow political evolution approach to this problem rather than a revolutionary one will be up to the task of minimizing the ongoing crisis, and preventing speculative economic crashes in the future.

Given the indebtedness of both parties to Wall Street's masters of the universe, we are far more likely to get sweeter smelling "business as usual" regulations than real regulatory reform.

For the immediate future, I fear that the massive scale of concealed toxic assets and associated trillions of $ in write downs will overwhelm any attempts to regulate or control the situation.

No reasonable person should discount the distinct possibility that the worlds and our economic future will become much worse before it begins to improve.

Posted by: frisbeejon | June 17, 2009 8:10 PM | Report abuse

The insidious triumvirate of Summers, Geithner and Bernanke have one subliminal objective namely the resurrection of the oligarchic plutocracy and malign Greenspanism. Today's recommendations by Pres. Obama didn't even come close to rectifying the malignant financial cancer which is destroying this nation! While other nations may have military dictatorships and such, Americans have sadly become indentured servants to our "too big to fail" financial parasites.

Posted by: dgward44 | June 17, 2009 9:17 PM | Report abuse

Catching the fly was fun. According to the report, he also disposed of it himself. Cleans up his own messes.

Would that his predecessor had done the same. The mess in the middle East, the mess of the economy, the health care mess, the federal deficit mess, the polarized America mess, the crumbling infrastructure mess, the war crimes mess, the trashing the environment mess; lot of messes there. Shrub didn't clean up one of them.

Posted by: jpk1 | June 17, 2009 10:15 PM | Report abuse

As usual, Obama's rhetoric sounds remarkably good. But his true intentions were signaled by his appointments, for example Summers and Geithner. These people will not preside over meaningful reform, period.

Posted by: dowty | June 18, 2009 9:52 AM | Report abuse

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