Barack Obama, Regulatory Proposals

OBAMA FOR USA. On March 25, 2009, Mr. Geithner appeared before Congress to lay out a set of proposals to replace a financial regulatory system that he argued had failed with "better, smarter, tougher regulation."

Mr. Geithner's plan would create a new still-unidentified "systemic risk regulator" that would have the authority to scrutinize and second-guess the operations of bank holding companies like Citigroup or JPMorgan Chase, insurance conglomerates like the American International Group and other financial institutions that are deemed too big to fail.

Hedge funds and private equity funds, which have been almost entirely unregulated, would have to register with the S.E.C. and tell it about their risk-management practices. Many financial derivative instruments, like credit-default swaps, would come under supervision for the first time.

Mr. Geithner's most specific proposal, which Democratic lawmakers initially hoped to pass quickly, would allow the federal government to seize control of troubled institutions whose collapse or bankruptcy might jeopardize the broader financial system.

On May 13, in its first formal detailed effort to overhaul financial regulations, the Obama administration sought new authority over the complex financial instruments known as derivatives that were a major cause of the financial crisis and have gone largely unregulated for decades. The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

Mr. Geithner said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivative markets. The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them.

In mid-May, Congress approved regulatory legislation that President Obama had sought for the credit card industry. The bill will establish new restrictions for credit card companies, including one that would require 45 days notice before a change in interest rates. It would also prohibit companies from raising interest rates on existing balances unless a card holder fell 60 days behind on minimum payments, and would make it much harder to issue cards to students.

On June 17, President Obama proposed a new regulatory structure for the country's financial system, declaring that it is needed to protect the rights of ordinary consumers and to guard against the murky practices that led to the current financial crisis.

Under Mr. Obama's plan, the Federal Reserve would expand its current reach of overseeing bank holding companies - those owning more than one commercial bank - to "other large firms that pose a risk to the entire economy in the event of failure." It would set up a new oversight council, to be led by the Treasury secretary, to advise the Fed on regulatory gaps and issues that do not fit into the traditional framework. The council would identify companies that would come under heightened supervision by the Fed because their problems could pose a system-wide shock.

The plan would give the Federal Deposit Insurance Corporation new powers to seize troubled banks and other companies it now does not have the authority to control when those institutions falter and could harm the larger financial system. It would also give the Securities and Exchange Commission and the Commodity Futures Trading Commission the power to implement new rules for derivatives and other complex instruments like credit default swaps.

And it would create a new federal agency to oversee consumer products such as mortgages, annuities and credit cards. That proposal has provoked a barrage of criticism from banks, which would have to face a new set of examiners in addition to the ones who already supervise them for safety and soundness.

On June 30, the Obama administration sent Congress a detailed, 150-page proposal for that agency. To protect consumers, it would set new standards for ordinary mortgages, restrict or prohibit risky loans, investigate financial institutions and enforce new laws aimed at protecting credit card customers. As expected, industry executives vowed to fight Mr. Obama's plan with everything they have, even though banks are still heavily dependent on many taxpayer-supported loans and loan guarantees to get through the crisis. "It's going to be a huge fight," said Edward L. Yingling, president of the American Bankers Association. "This agency would have broad powers that go beyond every consumer law that has ever been enacted."