Obama's Financial Sector Reform Proposal

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Table

of

Contents

Introduction

#

Summary

of

Recommendations

#

I.

Promote

Robust

Supervision

and

Regulation

of

Financial

Firms

#

II.EstablishComprehensiveRegulation

of

Financial

Markets

#

III.ProtectConsumers

and

Investors

from

FinancialAbuse

#

IV.Provide

the

Government

with

the

Tools

it

Needsto

Manage

FinancialCrises

#

V.Raise

International

Regulatory

Standards

and

Improve

Interrlational

Cooperation

#

o

Introduction

Overthepast

twoyears

we

have

faced

themost

severefinancialcris:ssince

the

GreatDepression.Americansacross

the

nationarestruggling

with

unemp:oyment,failingbusinesses,falling

home

prices,anddecliningsavings.

These

challelges

have

forcedthegovernmenttotakeextraordinarymeasurestorevive

our

financial

S)

stem

sothat

peoplecan

accessloansto

buy

a

caror

home,

pay

fora

child's

education,

OI

financeabusiness.

The

roots

of

thiscrisisgo

back

decades.

Years

withoutaseriouseconomicrecessionbredcomplacency

among

financialintermediariesandinvestors.

Firancial

challengessuchas

the

near-failure

of

Long-TermCapital

Management

andthe

Asian

FinancialCrisis

hadminimal

impact

on

economicgrowth

in

the

U.S.,

which

bled

exaggeratedexpectationsabouttheresilience

of

our

financialmarkets

and

firms.Risingassetprices,particularly

in

housing,

hid

weak

creditunderwritingstandardsand

maskedthe

growingleveragethroughout

the

system.

Atsome

of

our

most

sophisticatedfinancialfirms,risk

management

;;ystemsdidnotkeep

pacewiththe

complexity

of

new

financialproducts.

The

lack

of

transparencyandstandards

in

marketsforsecuritizedloanshelpedto

weaken

underwr

tingstandards.

Market

discipline

brokedown

asinvestorsreliedexcessively

on

creditratingagencies.Compensationpracticesthroughout

the

financialservicesindustry

rewarded

short-termprofitsat

theexpense

of

long-termvalue.Households

saw

significantincreases

in

accesstocredit,

but

thosegains

were

overshadowed

by

pervasivefailures

inconsumer

protection,leavingmanyAmericans

with

obligationsthat

they

didnotunderstandandcould

not

afford.

1

Whilethiscrisishadmanycauses,itisclearnowthatthegovernmeltcouldhavedonemoretopreventmany

of

theseproblemsfromgrowingout

of

contrc1andthreateningthestability

of

ourfinancialsystem.Gapsandweaknessesinthesuperuisionandregulation

of

financialfirmspresentedchallengestoourgovernment'sability

t::>

monitor,prevent,oraddressrisksastheybuiltupinthesystem.Noregulatorsawits

job

asprotectingtheeconomyandfinancialsystemasawhole.Existingapproachesto

bmk

holdingcompanyregulationfocusedonprotectingthesubsidiarybank,notoncomprehensiveregulation

of

thewholefirm.Investmentbankswerepermittedtooptforadifferentregimeunderadifferentregulator,andindoingso,escapedadequateconstraintsonleverage.Otherfirms,suchasAIG,ownedinsureddepositories,butescapedthestridures

of

seriousholdingcompanyregulationbecausethedepositoriesthatthey

owmd

weretechnicallynot"banks"underrelevantlaw.Wemustactnowtorestoreconfidenceintheintegrity

of

ourfinanci

al

system.ThelastingeconomicdamagetoordinaryfamiliesandbusinessesisaCOlstantreminder

of

theurgentneedtoacttoreformourfinancialregulatorysystemandJutoureconomyontracktoasustainablerecovery.

We

mustbuildanewfoundation

fOl

financialregulationandsupervisionthatissimplerandmoreeffectivelyenforced,thatp:'otectsconsumersandinvestors,thatrewardsinnovationandthatisabletoadaptandevolvewithchangesinthefinancialmarket.Inthefollowingpages,weproposereformstomeetfivekeyobjecti"es:

(1)

Promoterobustsupervisionandregulationoffinancialfirms.

Financialinstitutionsthatarecriticaltomarketfunctioningshould

be

subjecttostrongov{:rsight.Nofinancialfirmthatposesasignificantrisktothefinancialsystemshould

be

unregulatedorweaklyregulated.Weneedclearaccountabilityinfinancialoversightandsupervision.Wepropose:AnewFinancialServicesOversightCouncil

of

prudentialregulatorstoidentifyemergingsystemicrisksandimproveinteragencycooperation.NewauthorityfortheFederalReservetosuperviseallfirmsthato)uldposeathreattofinancialstability,eventhosethatdonotownbanks.Strongercapitalandotherprudentialstandardsforallfinancialfinns,andevenhigherstandardsforlarge,interconnectedfirms.AnewNationalBankSupervisortosuperviseallfederallycharteredbanks.Elimination

of

thefederalthriftcharterandotherloopholesthatallowedsomedepositoryinstitutionstoavoidbankholdingcompanyregulation

by

theFederalReserve.Theregistration

of

advisers

of

allhedgefundsandotherprivatepools

of

capitalwiththeSEC.

(2)

Establishcomprehensivesupervisionandregulation

of

financialmarkets.

Ourmajorfinancialmarketsmust

be

strongenoughtowithstandbothsystem-widestressandthefailure

of

oneormorelargeinstitutions.

We

propose:Enhancedregulation

of

securitizationmarkets,includingnewrequlrementsformarket

2

transparency,strongerregulation

of

creditratingagencies,ardarequirementthatissuersandoriginatorsretainafinancialinterestinsecuritizedloans.Comprehensiveregulation

of

allover-the-counterderivatives.NewauthorityfortheFederalReservetooverseepayment,clearirg,andsettlementsystems.

(3)

Protectconsumersandinvestorsfromfinancialabuse.

Torebuildtrustinourmarkets,weneedstrongandconsistentregulationandsupervision

0:

consumerfinancialservicesandinvestmentmarkets.Weshouldbasethisoversightnotonspeculationorabstractmodels,butonactualdataabouthowpeoplemakefinancialdecisions.Wemustpromotetransparency,simplicity,fairness,accountability,andacces;.Wepropose:AnewConsumerFinancialProtectionAgencytoprotectconsumersacrossthefinancialsectorfromunfair,deceptive,andabusivepractices.Strongerregulationstoimprovethetransparency,fairness,andappropriateness

of

consumerandinvestorproductsandservices.Alevelplayingfieldandhigherstandardsforproviders

of

conSUlT.er

financialproductsandservices,whetherornottheyarepart

of

abank.

(4)

Improvetools

for

managingfinancialcrises.

We

needtobesun:thatthegovernmenthasthetoolsitneedstomanagecrises,

if

andwhentheyarise,sothatwearenotleftwithuntenablechoicesbetweenbailoutsandfinancialcollapse.Weprop,)se:Anewregimetoresolvenonbankfinancialinstitutionswhosefailnrecouldhaveserioussystemiceffects.RevisionstotheFederalReserve'semergencylendingauthority

tc

improveaccountability.

(5)

Raiseinternationalregulatorystandardsandimproveinternationalcooperation.

ThechallengeswefacearenotjustAmericanchallenges,theyareglobalchallenges.So,

as

weworktosethighregulatorystandardshereintheUnitedStates,wemustasktheworldtodothesame.

We

propose:Internationalreformstosupportoureffortsathome,includingstrmgtheningthecapitalframework;improvingoversight

of

globalfinancialmarkets;coordinatingsupervision

of

internationallyactivefirms;andenhancingcri5ismanagementtools.

In

additiontosubstantivereforms

of

theauthoritiesandpracticesoLegulationandsupervision,theproposalscontainedinthisreportentailasignifican1restructuring

of

ourregulatorysystem.

We

proposethecreation

of

aFinancialServicesOversightCouncil,chaired

by

Treasuryandincludingtheheads

of

theprincipalfederalfJ.nancialregulatorsasmembers.Wealsoproposethecreation

of

twonewagencies.Weproposethecreation

of

theConsumerFinancialProtectionAgency,whichwill

h ~

anindependententitydedicatedtoconsumerprotectionincredit,savings,and

p a y m l ~ n t s

markets.Wealsoproposethecreation

ofthe

NationalBankSupervisor,which

wi!

beasingleagencywithseparatestatusinTreasurywithresponsibilityforfederallychmtereddepositoryinstitutions.Topromotenationalcoordinationintheinsurancesector,weproposethecreation

of

anOffice

of

NationalInsurancewithinTreasury.

3