Last Wednesday, the Obama Administration launched a trial balloon detailing a plan
to create a new financial super-regulator and otherwise rewrite the decades-old
system. The next day, House FinServ Chairman Frank (MA) said the idea was DOA
and Senate Banking Chairman Dodd (CT) was similarly unimpressed. So, on Friday,
FedFin pulled together what was left of the Administration’s idea to determine what
will in fact happen to an ambitious plan that reminds us a lot of one the Clinton
Administration tried early in its term to no avail. This time, the crisis will give the
Obama team more firepower than they had the last time, but we don’t think they’ll
get much of what they floated.
This will disappoint industry advocates who have pressed hard for a single, super
regulator. The choices now are between same-old, same-old – which neither
Congress nor the Administration will accept – or a new, still-fragmented system of
even more powerful financial regulators with deeper reach into every crevice of the
industry. It isn’t what we like, just what we think will happen.
How will this work? Some of it will come under current law. One immediate
priority is the rewrite of industry capital rules, which is moving quickly ahead (see
Client Reports in the CAPITAL series). As evident in the Treasury/SEC/CFTC
derivatives Plan (see Client Report DERIVATIVES10), this includes not only capital
requirements on regulated firms, but also proxy ones on hedge funds and other big
players in the OTC market. Much in the plan requires legislation (see below), but the
capital and related prudential standards generally don’t. They will thus be quickly
put in place, although not implemented until the industry is better able to withstand
capital calls without running back to Treasury.
If there were any doubt about regulators’ ability to rewrite the rules of the game
under current law, one need look no further than the FDIC’s new deposit-insurance
scheme (see FSM Report DEPOSITINSURANCE68). There, the FDIC decided by
fiat to shift the base for the new special assessment from deposits to assets less
capital. This led to a rare public outburst from Comptroller Dugan, but Chairman
Bair prevailed and the rule is out, final and an important precedent for other changes
in the deposit-insurance system to come following enactment before the Memorial
Day recess of other changes to the FDIC (an FSM Report on this will shortly be
provided to clients).
But, even with the broad scope of power under current law and the will now to use
it, new law is required to reform financial-industry regulation. That reform is
needed and accepted by all. How – not if – is the question. In our initial strategic
forecast of the prospects of regulatory reform (see Client Report REFORM), we
anticipated many of the obstacles that tripped up the Obama big plan. Now, we’ll
build on that analysis and forecast the outcome for the next round in this debate,
briefly detailing likely winners and losers when Congress gets down to work this
month on the final version of the Administration plan.
• A Super-Regulator: As noted, we think this doesn’t stand a chance. Instead,
we expect Congress to keep the system more or less as is – see below – and
add to it a super-structure of systemic regulation and resolution authority.
Neither of these will come quickly or easily – see, for example, the problems
confronting Secretary Geithner’s resolution plan (see FSM Report
SYSTEMIC4) since he launched it in March and Rep. Frank said he could
enact it in a week or two. But, each will come, likely through a council
approach to systemic oversight and new power for the FDIC to close holding
companies, not just insured depositories. The Feds will keep its powers and,
in fact, get new ones not just for systemic institutions, but also for large
providers of payment-and-settlement services.
• OTS: Sorry, guys, but this is over. If there had been any hope of keeping OTS
as is, it was doomed by the withering IG report on the OTS capital-backdating
fiasco and the agency’s tepid response to the problems thus revealed. Even if
OTS had hopes from a policy perspective, these are dashed by its growing
financial woes. With fewer and fewer surviving big thrifts, the regulator
FedFin Weekly Alert for June 1, 2009 3
simply can’t fund its operations without imposing assessments that will
bankrupt any thrift slow to convert to a national charter.
• SEC and CFTC: In contrast to the OTS, these agencies will, we think remain
almost as is. They’ll lose a bit of power – see below – but Congress will kill
any merger of securities and commodities regulation should the
Administration – which we doubt – propose it. A merger raises serious
substantive issues about the new entity, but Congress won’t ever get around
to debating them because the jurisdictional hurdles to reform are insuperable.
• FPSC: At the start of this year, we advised clients (see Client Report
CONSUMER2) to expect a Financial Products Safety Commission. A version
of this was introduced early this session by Senate Majority Whip Durbin (see
FSM Report CONSUMER4). Initially, Chairman Frank opposed the idea, but
now he’s backing it, with hearings set to start on June 10. Here too, the
question isn’t if anymore; now, it’s how. We expect the FPSC to have power
not only over mortgages and credit cards – whatever’s left of them after recent
legislation – but also to expand into the full range of retail banking, securities,
asset-management and insurance products. We also expect the FPSC to have
hard-hitting enforcement powers that make the plaintiffs’ bar very, very
happy. This is, though, a tough fight that could bottle up the bill in the Senate
and force a banking-industry friendly compromise down the road, cold
comfort though it is.