Obama sets off financial reform debate with plan

President Obama unveiled on Wednesday a long-awaited effort to reshape the financial system by adding a new office on consumer protection, reducing the incentives for risky investments and granting a heavier hand to the central bank to prevent future crises.

The proposals require congressional approval and will set off many months of debate on Capitol Hill and a fervent lobbying battle involving every facet of the industry. In many areas, the administration sought to avoid some of the toughest battles between congressional committees and federal agencies vying for power in the new regulatory landscape.

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“We seek a careful balance. I have always been a strong believer in the power of the free market,” Obama said in prepared remarks. “I believe that our role is not to disparage wealth, but to expand its reach; not to stifle the market, but to strengthen its ability to unleash the creativity and innovation that still make this nation the envy of the world.”

The proposal would empower the Federal Reserve to oversee systemic risk, establish a Consumer Financial Protection Agency to regulate consumer products, abolish the Office of Thrift Supervision (OTS) and give the government new power to resolve non-bank firms teetering on collapse.

The government, under the plan, could also increase capital and liquidity requirements for large firms threatening the economy. Determining the criteria for such firms will prompt a tough debate. The administration is also intent on setting up a council of regulators to work side-by-side with the Federal Reserve, but it is unclear the extent of the council’s power.

The proposal backed away from some proposals once under consideration including a merger of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). That debate would have spurred a tough battle between the agriculture committees in Congress and the House Financial Services Committee and Senate Banking Committee.

“It is worth considering whether further consolidation is possible among the banking regulators," said Sen. Charles Schumer (D-N.Y.). "While the administration may have left the division of responsibility on derivatives regulation unsettled, the SEC should be the lead regulator over any products impacting securities and equities markets. It is a stronger regulator than the CFTC and is better equipped to oversee products like credit default swaps that can have the same effect on stock prices as short-selling.”

Lobbying groups, unions and consumer advocates were already staking their positions before Obama officially announced the plan.

“We’re concerned that overall, the proposal simply adds to the layering of the system without addressing the underlying and fundamental problems,” said David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets.

Ed Yingling, head of the American Bankers Association (ABA), said the proposal is “so vast and controversial that it will be extremely difficult to enact,” and that it “needlessly rips apart” existing regulatory agencies. The consumer protection office will be stridently opposed by the financial industry.

Unions and backers of the proposal were equally quick to the draw.

“We must be on guard for a big fight with the financial industry and its lobbyists, who continue to try to dilute and nullify real financial reform,” said Anna Burger, Secretary-Treasurer of the Services Employees International Union (SEIU).