Investing

How Obama's New Financial Rules Can Affect You


Proposed new regulations outlined Mar. 26 by the Obama Administration would rein in financial-services companies like never before.

If passed by Congress, the rules would give the government new powers to take over insurance companies and strictly regulate the largest financial services companies. Also, they would regulate hedge funds, venture capital, and private equity funds for the first time, and implement new rules for money market funds to prevent rapid, mass withdrawals.

The financial sector is certainly eyeing these proposals closely. But how will all this affect the average person?

Here are some questions and answers about the proposed regulations and what they mean to you.

What's the Goal?

Q: What does the Obama Administration hope to accomplish through these regulations?

A: Treasury Secretary Tim Geithner told the House Financial Services Committee on Thursday that the financial services system is unstable and fragile and has failed in fundamental ways. He said inadequate checks and balances had attracted fraud and that consumer protection had failed.

Addressing those issues, he argued, requires rules that are "simpler and more effectively enforced and produce a more stable system, that protects consumers and investors."

Q: How would regulations be tightened?

A: For starters, the government is proposing that an existing agency, or perhaps a newly created one, be given the power to regulate any type of company whose failure could harm the entire financial-services industry. That could be banks, insurance companies, hedge funds, and others.

The most significant change is that this agency would have enough power to force a company to take action such as increasing capital, change accounting policies, or reduce debt to remain financially solid.

"Retail investors should find it reassuring that financial institutions will probably be subject to what I will call financial adult supervision," said John Coffee, a securities professor at Columbia Law School. "It will keep them from betting the ranch on one investment strategy or leveraging up to the eyeballs."

Geithner did not suggest which agency should get all this power. Coffee said that was probably intentional because it will be a major sticking point as the proposal goes through Congress.

Impact on Insurers

Q: How might insurance companies be affected?

A: The Administration proposes giving the federal government the right to take over operations of insurance companies and other financial institutions much as it can with banks already.

The Treasury Secretary, in consultation with the president, would be able to act after the Federal Deposit Insurance Corp. and the Federal Reserve Board determine a company may fail. The government could temporarily take over the company or place it in receivership and wind down its operations. It could lend money, buy assets, or buy stock in the company as part of its effort to fix the problems.

The regulation would be modeled on current FDIC bank regulations.

Q: What will happen to my insurance policies and annuities?

A: Insurance companies are largely regulated by states, which creates a patchwork of varying rules that can drive up costs. Uniform federal government oversight could improve efficiency and ultimately lower costs for consumers, said Jack Dolan, a spokesman for the American Council of Life Insurers.

The $5 trillion life insurance industry, which serves 75 million customers, operates under a regulatory system mostly created in the 1800s, Dolan said. "We just really are in a new era where you do need to have someone at the federal level overlooking the whole landscape of financial services and seeing where problems might arise."

Banks' Reaction

Q: How are banks reacting to the proposals?

A: A trade group for the nation's banks opposed any changes that would detract the focus of the Federal Reserve Board in forming monetary policy or the FDIC's mission of insuring bank deposits.

"It is dangerous to risk confusing the mission of the FDIC and detracting from the power of its image in the minds of depositors," Edward L. Yingling, chief executive of the American Bankers Assn., said in a statement. Besides, he said, banks pay tens of billions of dollars for FDIC operations "and it would be completely unfair to pull resources from the banking industry to resolve nonbanks."

Q: Would my investments in money market funds be safer, or would yields be affected, if the regulations are passed?

A: The Administration is proposing that the Securities & Exchange Commission strengthen the regulations around money-market funds to reduce the risk of a run on funds. The measures would also ensure money funds can always return investor cash on demand.

Consider an example of what can go wrong: Last fall, institutional investors spooked by the Lehman Brothers failure suddenly pulled huge sums out of the The Primary Fund, which forced fund managers to unload assets at fire-sale prices to come up with the money. That pushed down the value of the fund, causing investors to suffer losses in what had been characterized as one of the safest investments.

The Administration's money-market proposals lack specifics, but they sound similar to measures unveiled last week by the money-market industry. Many funds already have adopted more cautious investment strategies, said iMoneyNet Managing Editor Connie Bugbee, who doesn't expect a significant impact from the regulatory proposals. Still, investors may have a greater comfort level if they feel funds will be watched more closely, she said.

Hedge Fund Regulation

Q: How would the regulations affect hedge funds and risky, exotic types of investments?

A: Hedge funds and other funds like venture capital funds above a certain level of assets would have to register with a government regulator. Geithner didn't say, however, what kind of authority the government would assert once the funds register.

Anyway, this is likely to have little direct impact on most of us because hedge funds typically deal with pension funds and very high-net-worth investors, said Richard Baker, chief executive of the Managed Funds Assn.

In addition, the government will regulate markets for derivatives and credit default swaps, risky investment instruments that have caused many banks and insurance companies to write off millions of dollars in losses. All of this contributes to creating a government-run system that will help keep risk in check.

Q: What happens next with the proposals?

A: They require congressional approval and will be proposed in many separate pieces of legislation. The Obama Administration is pushing for quick action and has already sent Congress the first bill—one permitting the government to seize control of nonbank institutions such as insurance companies.

The chairman of the House Financial Services Committee, Rep. Barney Frank (D-Mass.), said action could come on the bill as early as this week.

Pitt is a reporter for AP .


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