Dems work to push banking overhaul

June 18, 2009 2:31:40 PM PDT
President Barack Obama's plan to transform the Federal Reserve into a super-regulator ran into skepticism Thursday from lawmakers who worry that the central bank is not the best suited to keep an eye on firms deemed so big and influential that their demise could hurt the economy.

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Senators voiced misgivings as Treasury Secretary Timothy Geithner began a marathon day of selling Obama's financial regulatory plan to give the Fed more authority, create a new consumer protection agency and bring unregulated sectors of the financial markets under government oversight.

"I do not believe that we can reasonably expect the Fed or any other agency to effectively play so many roles," said Sen. Richard Shelby, R-Ala., noting that it also sets monetary policy, regulates banks and handles an array of other functions.

Some lawmakers have proposed that the job of overseeing large institutions be left to a council of regulators, not a single agency.

Geithner anticipated that point in his testimony before the Senate Banking Committee, saying in his opening remarks: "You cannot convene a committee to put out a fire."

Committee Chairman Christopher Dodd, D-Conn., also raised questions about the use of the Fed for such an overarching task over the financial system. But he applauded the administration for including a new agency to protect consumers in their banking transactions.

Noting that banking interests already are criticizing the new agency, Dodd said: "The very people who created the damn mess are the ones now arguing that consumers ought not to be protected."

But Dodd blamed the Fed for "dropping the ball" on consumer protections.

Geithner said that in creating the consumer protection agency, the administration was taking power away from the Fed even as it was adding to its authority.

"That is a substantial diminishment of authority, preoccupation and distraction," he said.

Democrats and Republicans challenged Geithner on other details of the plan. Democratic Sens. Charles Schumer of New York and Jon Tester of Montana pressed Geithner to explain why the administration did not seek greater consolidation of regulatory agencies.

"A multiplicity of regulators tends to produce less oversight overall," Schumer said.

Geithner conceded the regulatory system is not ideal. But he said it was not necessary to streamline the system to address the financial crisis that hit Wall Street, and he suggested it would have been a politically difficult task. "We did not want to put you in a position of having to spend a lot of time on changes that may be desirable, that may leave us with a neater system, maybe a more efficient system, but were not central to the cause of the problem," he said.

The Senate hearing also revealed philosophical cracks between lawmakers who believe the Fed is too independent and those who believe the Obama plan diminishes its independence.

Several lawmakers said they were taken aback by a proposed administration requirement that the Treasury approve emergency loans from the Fed to a troubled financial institution. The Fed can now take such emergency steps on its own.

"All of a sudden the Fed is acting more like a department of the government than an independent bank," said Sen. David Vitter, R-La.

Though the administration would empower the Federal Reserve to oversee the largest and most influential financial firms, Obama does propose a council of federal regulators to monitor risk across the broader market but would not give it the authority over large financial institutions.

Sen. Mark Warner, D-Va., said the administration plan "emasculated" the power of such a regulatory council.

Geithner was to testify in the afternoon before the House Financial Services Committee.

Obama's plan comes amid public skepticism about the way the president is handling some aspects of the economic crisis. Sixty percent of Americans don't believe the president has a strategy for dealing with the budget deficit, and almost half disapprove of his handling of problems facing the auto industry, according to a New York Times/CBS News poll published Thursday.

Still, 57 percent approve of the president's overall handling of the economy, according to the telephone survey of 895 adults contacted Friday through Tuesday.

Obama's lofty job approval rating slipped a bit in a new Wall Street Journal/NBC News poll. The poll found 56 percent approved of the job Obama was doing, down from 61 percent in April.

But a swift legislative endorsement of the plan could be difficult. Dodd is leading a major overhaul of the nation's health care system and the Senate also faces a debate on whether to confirm Supreme Court nominee Sonia Sotomayor.

House Republicans said Obama's plan would go too far and bury the market in unnecessary regulation.

Senate Republicans were less dismissive but stopped far short of endorsing the proposal. Shelby and Sen. Judd Gregg, R-N.H., questioned aspects of the plan but said they hoped to work with Democrats to make it stronger.

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