WASHINGTON (MarketWatch) — One day before the White House unveils its much-anticipated financial regulatory reform proposal, consumer and corporate lobby groups clashed over key aspects, including whether lawmakers should create a financial products safety commission or set up a regulator to help unwind financial institutions.
“Our economy collapsed because consumers were not protected,” said Ed Mierzwinski, a director at the U.S. PIRG, a federation of state Public Interest Research Groups. “We should have a strong regulatory agency with will and authority to protect consumers. Our regulatory system is broken. Bank regulators are captured by the industry.”
Mierzwinski and members of a new lobby group, Americans for Financial Reform — an organization of labor union, consumer groups and other organizations - are urging the creation of a Financial Products Safety Commission, which would prohibit lending banks from offering mortgage products it deems unsafe to consumers. The group believes bank regulators are not protecting consumers effectively and when they do, banks move to register with another regulator.
President Barack Obama promised on Tuesday to propose a “very strong set of regulatory measures” and said that the U.S. must have an updated regulatory system. At a press conference with the visiting president of South Korea, Obama said he expects Congress to act “swiftly” to put the new rules in place.
The administration is expected to advocate the creation of a financial products safety commission as part of its regulatory reform proposal.
The plan to be unveiled is expected to involve empowering the Federal Reserve to be a “consolidated supervisor” for large financial institutions whose collapse could cause collateral damage to the markets.
However, the U.S. Chamber of Commerce is opposed to the creation of such an entity, in part, because the group believes it would discourage other bank regulators from fulfilling their consumer protection responsibilities.
David Hirschmann, president of the Chamber’s Center for Capital Markets Competitiveness, said consumer protection may be best suited to a systemic regulator that has all the information about the financial markets. This entity would work with other bank regulators to protect consumers, he said.
“Wouldn’t it be better to have a regulator that knows the entities they are regulating to be responsible for consumer protection?” asked Hirschmann. “Setting up a commission would make the other agencies feel they are not responsible for consumer protection.”
To unwind, or not to unwind?
Consumer groups and the Chamber of Commerce also clashed about whether Congress should empower the Federal Deposit Insurance Corp. with the authority to collect fees and possible accept taxpayer funds to unwind systemically significant financial institutions.
The Obama administration is considering such an entity as part of its proposal, in part, because such an entity could help limit the collateral damage such a failure would have on the markets.
Rob Johnson, former chief economist for the Senate Banking Committee and a member of Americans for Financial Reform, said the group supports giving the FDIC resolution authority to collect fees from large financial institutions that could be used to pay counterparties of an insolvent institution in a way that prevents a systemic impact of its collapse.
“Too big to fail is too big to exist,” said Johnson. “Now in the era of too big to fail, the burden of the bailout which was several hundred billion in subsidies to banks, we need resolution regimes for financial services institutions.”
However, the Chamber of Commerce opposes such an entity, arguing the existing bankruptcy process could be improved to help restructure financial institutions in a way that does not favor one financial institution over another. Hirschmann argues that the result of such a resolution authority would be more taxpayer funds being allocated to help unwind systemically significant institutions, giving some firms an advantage over others.
“There may need to be some enhancements to the bankruptcy process, but it is far different to have a presumption that a mega firm fail in a particular way with a permanent seat at the table with one hand in the taxpayer pocket,” Hirschmann said.
Credit rating agencies
Obama’s proposal is expected to seek additional requirements to credit rating agencies, considered a key contributor to the financial crisis because of their high ratings for a wide-range of securitized sub-prime mortgages.
Specifically, the proposal is expected to require agencies to differentiate between structured products such as securitized mortgages and unstructured debt products, such as corporate bonds. Details about risks associated with ratings, methodologies and non-public rating data, will need to be disclosed in an easy to understand manner.
Credit rating agencies will need to disclose their performance measures for structured products so buyers of ratings can compare agencies better.
Derivatives
The proposal is also expected to provide more details about the Treasury Department’s hope that the Securities and Exchange Commission, Commodity Futures Trading Commission and the Fed exchange more detailed information about derivatives transactions.
The CFTC and SEC agreed to exchange more data under a current Memorandum of Understanding. However, both agencies do not have the authority to collect useful data on derivatives nor did the MOU require the two agencies to consider the systemic implications of the derivatives.
Lobby groups clash on financial regulatory revamp
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