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Financial Regulations: What Obama Wants


The Administration's proposals for regulating the financial markets are wide-ranging. The question now: Are they tough enough?

Give President Barack Obama credit for this, at least: His proposal to overhaul financial market regulation is ambitious, spanning everything from asserting control over complex markets for financial derivatives to reaffirming old-fashioned banking principles about the need for limited leverage and strong capital.

Yet critics say the White House shied away from some of the most difficult challenges in reshaping the regulatory structure, and some worry that the new rules don't have enough teeth. Obama's proposal also could run into difficulties in Congress, where many lawmakers have their own ideas about how to fix the system. Below, a look at the plan's key elements:

REWRITING THE REGS

What the White House wants, what critics are saying, and how the new rules might play out

Goal: Preventing a collapse of the financial system

Proposal: The Federal Reserve would take the lead in monitoring big financial firms for risks they pose to the overall economy. The Federal Deposit Insurance Corp. would play a key role in the cleanup of shaky financial companies.

Prospect: Much will hinge on how tough the Fed really would be and how well it and other agencies work together. Fed critics argue the agency has a mediocre record as a regulator and wields too much power already.

Goal: Protecting consumers from financial harm

Proposal: A new agency would regulate credit cards, mortgages, and other financial products aimed at consumers. Regulation of mutual funds and 401(k)s will remain with the Securities & Exchange Commission.

Prospect: Idea draws strong support from many Democrats, but financial firms hate it. If effective, the new agency could curb pricey fees and other tactics that bolster bank profits. It may also push down interest rates. Look for the industry to fight this one hard.

Goal: Regulating the unregulated

Proposal: For the first time, the Administration would impose regulation on credit-default swaps and other complex financial products. It would also require hedge funds to register with and make financial disclosures to the SEC.

Prospect: Many hedge funds already register, but the biggest may bristle at any changes forcing them to go beyond that. Critics also worry that proposed regulations for derivatives still leave traders plenty of loopholes to play games.

Goal: Shoring up the banks

Proposal: Banks would face more stringent capital requirements that could effectively limit the debt they can take on. The idea is to prevent highly leveraged banks from causing financial instability. Other financial firms will also face new capital limits.

Prospect: Expect plenty of grousing that tighter rules would hurt profitability and banks' ability to compete with other financial institutions. Given the near collapse of the system, however, that argument isn't likely to carry much weight.

Goal: Reining in the ratings agencies

Proposal: The Administration would leave the issuer-pays model for credit rating largely intact. But Obama & Co. would demand greater disclosure about the methods used to rate securities and want to impose tougher conflict-of-interest rules.

Prospect: Rules are less restrictive than many had anticipated, but critics will continue to challenge the reliability of ratings as long as issuers, not investors, pay.

Goal: Making lenders keep skin in the game

Proposal: Originators and sellers of mortgage-backed securities and other "asset-backed" debt would be required to hang on to a 5% stake. The goal is to help ensure they have a greater interest in maintaining high lending standards.

Prospect: The new rule would cut into profits and tie up capital, likely curbing the appetite of banks and others for securitization. This, in turn, would restrict the flow of funds available for new lending.

Francis is a correspondent in BusinessWeek's Washington bureau. Sasseen is Washington bureau chief for BusinessWeek.

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