Financial Overhaul: The Obama Administration’s Plan

by Amy Lillard

On the heels of conflicting financial data about the recession’s future, President Obama revealed his plan this week to protect the U.S. financial system from another catastrophe.

The key component of the administration’s plan is beefing up the Federal Reserve’s power, imparting the authority to regulate bank holding companies and other large firms, whose failure could (and did) put the country’s economy in peril. At the same time, the administration is calling for the creation of a new agency to oversee credit and lending practices, with the goal to prevent the risky loans and victimized borrowers that characterize the current housing crisis.

The plan takes aim at the weaknesses now apparent in the current regulatory system, which wasn’t able to respond to today’s complex financial instruments and which allowed abuses and excesses resulting in the country’s slump. One of these weaknesses is a lack of big-picture thinking: while agencies and regulators may be responsible for overseeing individual companies, no one is in charge of looking at the financial system as a whole.

Elements of the plan include:

• Boosting the authority of the Federal Reserve to enable increased supervision and regulation of financial companies. This will involve requiring increased capital commitments to offset loans and off-sheet commitments.
  
  
• Creating the Consumer Financial Protection Agency to review credit and lending practices, in order to provide protection for potential homeowners, students and credit card holders.
  
  
• Establishing the Financial Services Oversight Council to monitor the overall health of the U.S. financial system.
  
  
• Requiring that lenders retain a 5 percent stake in all asset-backed securities. This key component was created in order to discourage risky loans and the practice of passing at-risk assets off to other investors, ensuring banks have “skin in the game.”
  
  
• Mandating that all lenders be held to the same standards as banks, and that mortgage brokers provide clear and concise disclosures.
  
  
• Setting up a clearer method for regulators to dismantle troubled companies.
  
  
• Getting rid of the Office of Thrift Supervision. This office oversaw institutions such as Washington Mutual and AIG, which of course turned into some of the biggest failures of the economic crisis.
  
  
• Ordering shareholders to vote on compensation packages for executives in the financial industry.

The administration is now presenting the plan to legislators, and beginning the daunting process of deflecting critiques by the banking industry and Congress itself.


For Further Reading:
Geithner Defends Plan to Give Fed Stepped-Up Powers (Update2)
Forcing Banks To Put More 'Skin In The Game'
Obama Introduces Sweeping Financial
Obama Defends Financial Overhaul