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Dramatic proposal for U.S. markets

Obama proposed an overhaul of the regulatory system and creation of an agency to protect consumers.

WASHINGTON - President Obama moved yesterday to reverse the pendulum of history, proposing sweeping new government regulation of the financial industry and turning sharply away from the anti-government, pro-free-market passion that has dominated American politics for decades.

Obama proposed applying federal regulation for the first time to complex and sometimes little-understood financial innovations such as hedge funds and derivatives.

He also prescribed tough new standards for financial institutions that have grown so big that taxpayers have had to bail them out lest they drag down the national or even world economy.

The president's plan also calls for giving the Federal Reserve greater power over big financial institutions and creating a Consumer Financial Protection Agency to protect consumers from abuses in mortgages and credit cards.

Obama said the dramatic measures were necessary after the financial and economic crisis that has rocked the country and the world, a crisis that he said revealed that the government was woefully unprepared for a fast-changing financial system.

"A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th-century economic crisis, the Great Depression, was overwhelmed by the speed, scope, and sophistication of a 21st-century global economy," he told members of Congress, financial regulators, and interest groups in the East Room of the White House.

"My administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."

Obama's proposals push back against a national sentiment favoring less regulation of the marketplace that began with President Jimmy Carter in the late 1970s, accelerated with President Ronald Reagan in the 1980s, and continued well into this decade until it was shaken by the financial crash of last year.

Obama said he believed in the free market as the engine of economic growth even though he initiated a record $787 billion program of government spending and tax cuts to stimulate the shrinking economy and create jobs.

"I've always been a strong believer in the power of the free market," he said. "It has been and will remain the engine of America's progress, the source of prosperity that's unrivaled in history."

However, he also said that the government must regulate markets to ensure that insiders did not abuse the system or expose the entire economy to fallout: "We are called upon to put in place those reforms that allow our best qualities to flourish while keeping those worst traits in check."

Republicans came out swinging, calling the proposal a job-killing burden on business.

"The American people don't want Washington to get more involved in the private sector," said Rep. John A. Boehner (R., Ohio), his party's leader in the House. "This plan may slow down job growth at the time that families and small businesses across America need it most."

The reaction from business groups was mixed.

The influential U.S. Chamber of Commerce was displeased with Obama's proposal to create a Consumer Financial Protection Agency, which it said "cannibalizes regulatory expertise and adds yet another regulatory layer."

The Securities Industry and Financial Markets Association called the proposal an important first step. "We have a once-in-a-generation opportunity to rebuild our regulatory structure so that our financial system is more stable, more resilient, and better underpins a dynamic U.S. economy," said Tim Ryan, the group's president.

The Mortgage Bankers Association, which represents the lenders whose poor underwriting triggered the financial crisis, was generally supportive.

"We will work with Congress and the administration to ensure that the new regulatory structure does not create conflicting and contradictory regulatory regimes that further confuse both lenders and borrowers," said John Courson, the group's president.

"We will continue to argue for one preemptive set of mortgage regulations throughout the country to replace the current patchwork of state and local laws," he added.

Liberal groups largely welcomed the Obama plan, but they also found room for improvement. The Center for Economic Policy and Research, for example, said the proposal assumed that lapses and gaps in the regulatory system had caused today's problems, not mistakes by the regulators themselves.

"The basic story of this crisis was not that the regulatory authorities lacked the ability to rein in this disaster before it was too late," the group said. "Rather, the regulators - most importantly the Fed - opted not to use their power to rein in the housing bubble."

Obama's top economic adviser, Lawrence Summers, cautioned that no plan - and no president - can head off all crises. He said the best hedge against another financial collapse was for financial institutions to be better capitalized.

"I'm not sure that anybody can forecast crises with precision," Summers, director of Obama's National Economic Council, told the Associated Press. "That's why it's going to be critical to raise capital levels for all institutions."

So a key crisis-prevention component of the plan is higher capital, or shareholder equity, standards.

That may appear to be a no-brainer: If banks and other large institutions have more money, they won't be vulnerable if their risky bets go bad.

Banking regulators have been arguing for years over implementation of an international standard for bank capital. Treasury Secretary Timothy Geithner said yesterday that he hoped to move on enhanced capital standards "in parallel with the rest of the world."

Congressional Democrats said they would start writing legislation next month, and they predicted approval by the end of the year.

New Regulators, Closer Regulation

The proposed overhaul

of financial-industry oversight would:

Create a council of regulators called the Financial Services Oversight Council to monitor risk across the financial system.

Establish a Consumer Financial Protection Agency to protect consumers from deceptive practices by lenders

and brokers.

Give new authority to

the Federal Reserve to supervise financial firms considered so big that their failure could topple the economy and create

a system to dismantle troubled firms.

Eliminate the Office of Thrift Supervision, criticized for lax oversight of American International Group and IndyMac.

Give the Securities and Exchange Commission oversight of hedge funds and other private pools

of capital, including venture capital.

Initiate regulation

of "over-the-counter derivatives," such as the insurance-like contracts that felled AIG. The plan leaves in question who would regulate them.

Seek to deter lenders from writing bad mortgages and passing the risk off to investors by requiring that lenders retain a 5 percent stake in all asset-backed securities.

Let shareholders vote on compensation packages for financial executives.

- Associated Press


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