Obama's Regulatory Reform Plan

President Obama "unveiled" his regulatory reform plan today. Most of the details of the plan had already been revealed earlier and the "near-final" draft was released by the Administration last evening.

The administration has focused on five key areas for reform, which we have highlighted below along with the important actions proposed in those areas:

1) Promoting Robust Supervision and Regulation

• Raising capital and liquidity requirements
• Supervision by the Fed for all "too big to fail" firms
• Establishing a council of regulators for better coordination
• New National Supervisor to supervise all federally chartered banks
• Registration of hedge funds with the SEC
• Enhanced oversight of insurers

2) Establish Comprehensive Regulation and Supervision of Financial Markets

• Enhanced regulation of securitization markets
• Stronger regulation of credit-rating agencies
• Regulation of all OTC derivatives
• Payment & Settlement systems to be overseen by the Fed

3) Promoting Consumer and Investor Protection

• Establishing a new Consumer Financial Protection Agency

4) Improving Tools for Managing Crises

• Resolution mechanism for the orderly resolution of "too big to fail" financial companies
• Improving  accountability of Fed's emergency lending powers

5) Improving international regulatory standards and coordination

The plan greatly extends the supervisory powers of the Federal Reserve as it would become a consolidated supervisor over all large financial institutions such as Goldman Sachs (GS - Analyst Report), JP Morgan Chase (JPM - Analyst Report), AIG (AIG - Snapshot Report), etc., whose problems pose potential risks to the economic system. However, the Fed would be required to receive approval from the Treasury for emergency lending under "unusual and exigent" circumstances.

The proposal will most likely be debated strongly as many critics of the Fed argue that its loose monetary policy and failure to exercise the existing powers over banks ultimately led to the current crisis.

In order to fill in regulatory gaps and coordinate with the various agencies, the plan would create a council of regulators headed by the Treasury Secretary.

The plan also requires all hedge funds and private equity funds to register with the SEC and open their books to regulators.

Some of the existing regulatory agencies' powers to oversee mortgages, credit cards and other kinds of consumer debt are proposed to be given to a new regulator, called the Consumer Financial Protection Agency.

The Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, to create a single agency to supervise all banks with national charters.

The plan would impose tighter rules for securitization. It would also require the companies that issue mortgages to retain at least 5% of them on their books to discourage companies from marketing unsuitable loans.

The proposal also mentions that Treasury will work with other agencies to determine the future role of GSEs, Fannie Mae (FNM - Snapshot Report) and Freddie Mac (FRE - Analyst Report) and a report will be presented at the time of 2011 budget release.