Obama plans biggest finance reforms since Depression

McClatchy Newspapers

WASHINGTON — Nearly five months after he took office and amid signs the worst of the economic storm may be over, President Barack Obama this week rolls out his proposal for revamping federal regulation of the nation’s financial markets.

This proposal will be the broadest rewrite of financial regulation since the aftermath of the Great Depression. It will reshuffle the responsibilities of regulators, create new protections for consumers and investors, and should, for the first time, bring giant financial players such as hedge funds and private equity companies under direct federal supervision.

Some of the steps can be taken by executive action. The Obama administration already has announced some new regulations, such as limiting the number of oil contracts that big financial institutions can buy and forcing complex financial instruments called derivatives to be standardized and traded on an exchange with government oversight.

Other steps will require Congress’ approval, and in the weeks leading up to Wednesday’s formal launch, the administration has floated numerous trial balloons to gauge public and political support for a number of its proposed regulatory revisions.

“We’re going to have a major public-policy correction, since it’s the worst financial disaster since the Depression,” said Robert Litan, an expert on regulation at The Brookings Institution, a center-left policy research group. “The major features of the plan have been widely reported or leaked, so I would say that the proposal will be far-reaching, but not as comprehensive and far-reaching as one would have anticipated three months ago.”

Although the proposals seek to rectify lax federal regulation and a lack of discipline on the part of the private sector, the finance sector is putting on a brave face.

“For the most part, the industry actually supports regulatory reform. The key will be separating the politics from the policy,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, the trade group for big finance.

One of the more controversial proposals expected from Obama would give the Federal Reserve greater power to act as a systemic risk regulator. This would expand the Fed’s mission, most often associated with fighting inflation and setting interest rates.

One of the saddest lessons of the current financial crisis, the worst in seven decades, is that while several regulators saw bits and pieces of a mounting problem, no single entity knew what was going on across the entire financial sector.