Published June 19, 2009

Obama's 'big bang' seen as a mixed bag

Fed's new powers raise some concern; issue of 'too-big-to-fail' banks not addressed

By JOYCE KOH
IN NEW YORK

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IT has been billed as the most sweeping overhaul of America's financial system since the post-Great Depression reforms, but President Barack Obama's plan for regulatory reform has drawn mixed reactions from analysts and barely budged the markets.

All in the Fed's hands: Federal Reserve chairman Ben Bernanke holding a copy of the plan on Wednesday. Many are questioning the expanded role being given to the Fed in policing financial institutions.

The Obama plan, which was unveiled on Wednesday, has been praised for its comprehensive efforts to remake the financial landscape which has been deeply scarred by the crisis. But many question the expanded role given to the US Federal Reserve in policing financial institutions. Others complain that an opportunity has been lost to pare down the number of regulators in the system.

Under the proposal, the Office of Thrift Supervision and Office of the Comptroller of the Currency would be combined into a single National Bank Supervisor, merely shaving the number of banking regulators in the country from six to five. The survivors like the Securities & Exchange Commission (SEC) and Federal Deposit Insurance Corp (FDIC) would still closely guard their domains. At the same time, new agencies to protect consumers and oversee the insurance industry will emerge.

While there's no doubt that the tide in Washington has tilted towards more regulation, many are asking whether smarter regulation is what's needed instead.

The new plan does not seek to dismantle 'too-big- to-fail' financial institutions nor enforce any structural division of the industry between commercial and investment banks like what the Glass-Steagall Act did after the crash of 1929. Many commentators, including Nobel Prize-winning economist Joseph Stiglitz, have called for such policies.

Other critics suggest that merely overhauling regulatory rules misses the point. For instance, R Christopher Whalen, managing director of Institutional Risk Analytics, told National Public Radio: 'The fundamental point is that we don't need new tools; we need political will to clean up the mess.'

On Thursday morning, Treasury Secretary Tim Geithner defended the plan before the Senate banking committee. He was grilled on why the Fed was being given expanded powers despite previous regulatory failures and a possible conflict with its monetary-policy duties.

Mr Geithner responded that the Fed has 'greater knowledge and feel for broader market developments' than any other US banking agency.

When the widely anticipated plan was unveiled on Wednesday afternoon, the market gave it a tepid response. The Dow Jones slipped 0.1 per cent to 8,497.18 points, while the S&P 500 slipped 0.1 per cent to 910.71.

Bank stocks, under pressure the previous few sessions as the White House prepared to lay out its plan, also slumped.

Perhaps the most contentious issue for many analysts and economists is the move to make the Fed the uber-regulator - giving it new powers, when it has been held responsible for stoking the asset bubble in the first place.

Still, others on Wall Street concede that the central bank might be the best candidate for the role as it was better staffed and commanded more respect than other agencies.

As one senior banker told the Financial Times: 'We should be able to do business with the Federal Reserve as long as all these new powers do not go to its head.'

On Wednesday, arguing for the selection of the Fed, Mr Geithner said the administration had studied a range of alternatives and found that countries that split the functions of systemic regulator and central banker often suffered deeper financial problems during periods of crisis.

Besides the Fed's role, the retention of the current regulatory structure with most of its agencies intact also raised some eyebrows.

The Brookings Institution, a liberal Washington- based think-tank, said political constraints have caused the administration to 'stop short of a full solution in certain areas'.

Joe Nocera, a columnist for the New York Times, wrote: 'The Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself. Without question, the latter would be more difficult, more contentious and probably more expensive. But it would also have more lasting value.'

Even as analysts, commentators and economists toss up the merits of Mr Obama's financial plan, the political wrangling is just beginning. President Obama, who said the reform proposals are necessary to avoid another crisis, hopes to complete the overhaul by year-end.

But moving his plans through Congress is far from a sure bet. In its present form, the plan will almost certainly come up against resistance from bankers, lawmakers and even some government agencies.

The broad strokes have been painted to remake the US financial sector. But it will take a while before the details are filled in and we know for sure what is going to change.