Though the Obama administration appears to be succumbing to political realities in offering a less radical regulatory reform plan for the financial sector, the measures may still have enough teeth in them to attract serious opposition both in and out of government.
The plan, among other things, would create a systemic, or super, federal regulator, raise capital requirement for firms, impose more oversight over derivatives trading, establish greater protections for consumers and grant the government so-called resolution authority to deal with big institutions whose failure might threaten the overall economy.
"I think this is significant; I think they're headed in the right direction," says Lawrence White, a former White House economist and regulator. "They're trying to go up with a politically feasible proposal rather than a pie-in-the-sky one."
The plan, as outlined in a Monday newspaper op-ed piece by Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers, confirmed recent suspicions that the administration was backing off more sweeping changes to the existing regulatory system, such as creating a single banking regular and merging financial market regulators.
"We have had this debate about the regulatory structure every five to 10 years for the past 70 years and we can't come up with a system that is better enough to warrant all the disruption it will cause," said William Isaac, former head of the FDIC.
"The system we have today is complicated, but it also has a lot of checks and balance built into it. I don't believe the current regulatory structure led to today's crisis."
The Obama administration is expected to release full details of its plan on Wednesday, one day before Geithner testifies before the powerful House Financial Services Committee, where the long and complicated process of turning the blueprint into a piece of legislation will begin.
The plan bears some resemblance to the preferences of the Committee's chairman, Rep. Barney Frank, D—Mass., who will be one of several key players in shaping the legislation's final form.
Both the President and leading Congressional Democrats have repeatedly said they want a law in place by the end of the year, signifying swift and decisive action in addressing some of the systemic problems and regulatory failures that helped cause the nation's worst financial crisis in almost a century.
House Republicans are also committing a lot of political capital to the issue, having just last week released their own set of detailed measures, which differ significantly.
Aside from the usual obstacles over political party differences, however, legislation of this nature is unusually tricky because it is bound to create turf wars among regulators and oversight committees in Congress.
"They want to lessen the turf wars," says Ariella Herman, an associate at Turner GPA, who follows legislative affairs for corporate clients. " Still, there's no doubt there's going to be a turf battle."
A Capital Hill source familiar with the legilsative agenda played down that possibility, saying, "I think we can manage that well enough. There’s no reason to re-jigger the jurisdiction."
One area where that may still happen is derivatives, for which the Obama administration intends more thorough and stringent regulation.
Right now, the Federal Reserve, the Securities and Exchange Commission and the Commodities Futures Exchange Commission all have some regulatory authority over derivatives.
Meanwhile, different Congressional committees have oversight over those agencies, so that could pit the interest of agriculture committees in both the Senate and House against Frank’s committee as well as the Senate Banking Committee.
Another key area of contention may be the enhanced role of the Federal Reserve. The Geithner-Summers outline, though still somewhat on the subject, calls for the central bank to be the systemic regulator. It also mentions some kind of council overseeing the Fed in that capacity.
Congressional leaders, including Rep. Frank, Senate Banking Committee Chairman Chris Dodd, D—Conn., and its ranking GOP member Richard Shelby, R—Ala., and others strongly support a council approach.
It’s also still somewhat unclear at this point whether resolution authority over to too-big-to-fail firms will go to Fed — as opposed to the FDIC, which the Treasury had proposed at one point--or, again some kind of council of regulators.
Republicans—especially those in the House—adamantly oppose granting such powers to the Fed; in fact, their reform proposal strips the central bank of all its existing regulatory and oversight powers.
They are also opposed to sweeping, draconian regulation of derivatives, saying regulators failed to sufficiently exercise their existing powers in reigning in companies like AIG, which suffered massive trading losses.
Industry groups thus far have been supportive of the reform process, but that partly reflects a sense of inevitability about a package becoming law.
“From a systemic supervisor to resolution of non-banks and other areas, we in the industry understand the urgent need for reform and are working to provide substantive and constructive solutions as the political process moves forward,” Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association, Sifma told CNBC.com in a statement. (Ryan himself is a former federal regulator who worked in the aftermath of the savings-and-loan crisis two decades ago.)
Based on the most recent outline, the Obama administration’s package of reform is something House Democrats “can run with”, according to one senior Congressional source., who’s optimistc about a speedy legilsative process, possibly even yielding a full House vote in late July.
That would probably suit the White House just fine, particulary as it tries to push through even bigger, more high-priority legislative packages covering health care and energy policy.
“They really want a win here and want to get something through and not be mired in negotiations and cutback,” says Herman. “We're still just coming off the edge of a crisis. The Obama administration is trying to capitalize on that."
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