Obama’s super new banking rules

Obama’s market supervision strategy aims to prevent another financial crisis [AFP]

Barack Obama, the US president, has announced the most sweeping reorganisation of financial-market supervision since the 1930s.

The moves will touch almost every corner of banking from misleading or dangerous mortgages to credit cards and exotic financial products.

Among his main proposals, the creation of a new Super Regulator to oversee the industry in future.

The aim is to stop a financial crisis, like the one we’re now living though, from ever happening again.

At the centre of the plan which administration officials refer to as a “white paper” are new powers for the central bank the Federal Reserve to oversee the biggest financial players.

Firms whose collapse would rock the whole economy as Lehman Brothers did.

New dealers

There are new rules for the authorities to unwind and break up systemically important companies, in a manner that the Federal Deposit Insurance Corporation (FDIC) agency already does with failed banks.

A new “council of regulators” with broad co-ordinated responsibility is to be created to make sure consumers’ investments are safer in the future.

Firms must also have more cash for a rainy day to stop them getting in trouble so easily.

Geithner will be on Capitol Hill on Thursday in a bid to sell the financial plans to Congress [AFP]

Here’s how White House officials put it during a briefing to journalists late on Tuesday night.

President Obama has five key points in his financial regulation revamp plan.

1. Strong oversight of financial firms, with more and better capital reserves. This includes a new Financial Services Oversight Council, the Office of Thrift Supervision will be eliminated.

2. Stronger regulation of core markets and market infrastructure, including regulation of credit agencies and credit default swaps.

3. Strengthened consumer protection – a “clean break from the past”. Consumers [the people who got caught in the mortgage mess] will have greater transparency, simplicity, fairness, accountability, and access to fair lending laws.

4. New government tools to manage financial crises.

5. Higher standards globally.

Commenting on the new rules, Mohanned Aama of Beam Capital Management whose office is on Wall Street said: “I think the general thinking is correct … focusing on the largest super financial firms, if you will, whose failure basically has this negative effects all over the economy.

“But should we just get out the regulatory gun so to speak and aim at everybody? I don’t think so.”

Shares high

Obama’s proposals come at a time when bank and financial company shares generally have been sharply up.

Ten of the biggest names have begun repaying the original bailout forced upon then at the height of the crisis known as the Troubled Asset Relief Programme (TARP).

But with bank lending still frozen, many wonder about the renewed optimism, and whether enough has changed in bank board rooms to justify it.

Mohanned says: “The question is have we seen all the dirty laundry … did they come out clean with everything that’s bad with them.”

Viral Acharya, an economist of the Stern School of Business in lower Manhattan, told me he thinks its crucial to maintain the momentum in favour of regulation will the crisis is still being played out as once recovery comes the drive for greater oversight could be sapped.

“If we don’t get some of the key mechanisms in place before we come out of the crisis, then the political will, the regulatory bargaining power, might wane,” he said.

“The banking sector gains a little more bargaining power as things start to get better.”

And that is the concern. If the plans end up being more about appearance than actual reform … it could foster conditions for a future financial crisis. 

The administration must now sell its plans to congress.  Tim Geithner, the treasury secretary, will be on Capitol Hill to do so as early as Thursday.

The Obama administration says it hopes to get legislation changes through the congress by the end of the year, but the White House says no detailed cost estimate has been done yet.