In the first few weeks of the then-new Obama administration, Treasury Secretary Timothy Geithner announced a sweeping but vague overhaul of the U.S. financial system. The stock market showed what it thought of that idea by tumbling nearly 400 points.
Don't expect a repeat of that exercise when Geithner and President Obama announce another regulatory revamp on Wednesday: their aides have tried to avoid the possibility of surprising the market by assiduously leaking details. After a week of disclosures, bit by bit, the broad outlines of tomorrow's news may turn out to be the least-surprising White House announcement this summer.
In Wednesday's announcement, Geithner and Obama are expected to outline another reshaping of the financial system -- scaled back from earlier drafts -- that would put the Federal Reserve in charge of overseeing companies so large or significant that their collapse would lead to market turmoil. But a bigger consolidation into one uber-regulator is unlikely.
The administration believes the change is necessary because of the crop of regulatory agencies, with acronyms including SEC, FDIC, FINRA, OCC, NCUA, FFIEC, OTS, FHRA, and the FRB, that grown like weeds in the nation's capital. One possibility is the elimination of the Office of Thrift Supervision, which is tasked with the job of maintaining the soundness of savings banks and savings and loans, with poor results.
"Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated," Geithner and National Economic Council director Lawrence Summers wrote in an opinion article this week in the Washington Post.
The contours of the plan also appear to include more focus on asset-backed securities and more regulation of derivative contracts; another likely suggestion is the creation of a Consumer Financial Protection Agency.
"We put together a consumer protection agency that will...ensure that one agency is responsible for protecting consumers as opposed to having a lot of divided attention between consumers, investors, the soundness of financial institutions," Mr. Obama said in an interview with the Wall Street Journal. "I think the world has gotten more complicated... If suddenly you can, as a 20-year-old college student sign up for five different credit cards, if you find yourself able on a $30,000 a year income to buy a $400,000 house with no money down, then you are you are much more gullible to the inducements that are out there than a generation ago."
One hitch, though, is that even the president of the United States can't order this financial reshaping with the stroke of a pen. Congress created this dizzying array of agencies, and Congress may not choose to acquiesce.
Vesting more power with the Federal Reserve alarms some politicians in a position to block or delay the proposal, including Senate Banking Chairman Christopher Dodd, a Democrat, who prefers an entirely different approach. Federal Deposit Insurance Corp. Chairman Sheila C. Bair and John C. Dugan, the comptroller of the currency, have also been clashing. Lobbyists are entrenching.
And although Fed Chairman Ben Bernanke has his fans -- most notably the president himself -- Capitol Hill is actually moving toward increasing scrutiny of the organization.
In February, Rep. Ron Paul, the former Republican presidential candidate from Texas, introduced legislation that mandates a thorough audit of the Federal Reserve.
The audit bill now enjoys 229 co-sponsors -- or over half the entire U.S. House of Representatives. "The tremendous grass-roots and bipartisan support in Congress for HR 1207 is an indicator of how mainstream America is fed up with Fed secrecy," Paul said last week when his bill hit the halfway mark. "I look forward to this issue receiving greater public exposure."