How Obama's Financial Regulation Is Shaping Up

Nothing definite has been put together yet and whatever does evolve must get through Congress and possibly hostile Republican opposition. But it is clear that an entirely new level of regulation seems likely.

The efforts are coming from several fronts. One proponent is former Fed Chief Paul A. Volcker, who is a senior member of Obama’s economic team and leader of an international team to recommend new finance rules. Another is led by U.S. Rep. Barney Frank, head of the House Financial Services Committee. Yet another comes from staffers at the Federal Reserve. Holding things up is the appointment of Treasury Secretary designate Timothy F. Geithner who finally may be approved today.

Here are some chief areas of possible new regulation:

• Credit ratings agencies. New rules are possible to eliminate conflicts whereby ratings agencies such as Moody’s and Standard & Poor’s have helped companies structure financial instruments and then rated them.
• New standards for mortgage brokers. The SEC may become more involved in supervising underwriting standards.
• Trading credit default swaps. This would be done through several exchanges which are now being created and the new transparency would allow easier regulation.
• Forcing companies to back their exotic derivatives. One problem with deeply-troubled American International Group was that it was never required to put up any money to cover the derivatives it created. Firms would be required to do so.
• Rethinking sky-high leverage. It used to be that the SEC kept banks’ leverage rates in a reasonable 12 to 1 range. In 2004, the agency let banks go to 33 to 1 which was toying with danger. More leverage could be required.
• More extensive registration and regulation of hedge funds. Registration has been voluntary and the Bush Administration shunned hedge fund regulation. That is likely to change.

What hasn’t been figured out yet:

• What will the role of the Fed be? A big problem is that no single agency oversees the entire financial system. There are proposals to have the Federal Reserve do this, but critics fear this would be too much of a burden on the Fed, which must be the nation’s central bank and worry about inflation and money supply issues.
• Should banks be nationalized? It has already started since the taxpayers are already the single largest shareholders of giant banks like Bank of America and Citigroup. If these two were taken over there are fears that investors would flee from JPMorgan Chase, Wells Fargo and others who would worry that they would be next in line for nationalization.
• Should the SEC and the Commodities Futures Trading Commission be merged? This was a popular idea with the Bush Administration but appears to be losing steam.

Once Geithner gets approved, expect momentum to grow.