GOP, Experts Doubt Financial Overhaul Plan

(CBS/AP)  The Obama administration's aggressive plan for strict scrutiny of hedge funds and other freewheeling investors, part of the biggest expansion of financial restraints since the Great Depression, is drawing instant opposition from Republican lawmakers and the rules' targets. And skeptics are questioning whether the new rulebook would work anyway.

Wall Street wizards have proved adept at designing complex financial products to sidestep existing regulations. And Vincent Reinhart, former director of monetary affairs at the Federal Reserve, says, "You're going to see firms try to figure out how to be under the radar."

For example, private equity investors might try to buy large hedge funds and chop them into funds that would be small enough to operate unregulated, Reinhart said.

Treasury Secretary Timothy Geithner, unveiling the plan Thursday, said the nation's economic crisis demands bold action.

"We need much stronger standards for openness, transparency and plain commonsense language throughout the financial system," he told the House Financial Services Committee.

The administration's proposals, which require congressional approval, include:

Imposing tougher standards on financial institutions that are judged to be so big that their failure would threaten the entire system.

Extending federal regulation for the first time to all trading in financial derivatives - exotic instruments such as credit default swaps that are blamed for much of the economic carnage. "The product, right now, is simply not regulated," James Cauley of IDX Capitol told CBS News correspondent Nancy Cordes.

Requiring larger hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the Securities and Exchange Commission.

Creating a regulator to monitor the biggest institutions. Geithner did not say which agency should wield such authority, but the administration is expected to favor the Federal Reserve.

Empowering the government to take over major nonbank financial firms such as insurers and hedge funds if deemed necessary. Cordes reports these firms would be required to keep enough cash on hand to weather downturns, and If they didn't, they could be seized by the government, just like banks.

Committee Chairman Barney Frank, D-Mass., and many Democrats on the panel backed the proposals, while Republicans assailed them as too far-reaching.

Private analysts also questioned whether Geithner's plan would succeed in safeguarding the financial system.

"We're not in this mess because we need new rules," said Bill Fleckenstein, a Seattle-based hedge fund manager who accurately predicted the housing bubble. "We need to enforce the rules we already have," he said. "What we had was a complete breakdown by all our regulators. They simply didn't do their jobs."

And Fleckenstein said he didn't think requiring big hedge funds to register with the government would prevent devastating frauds like Bernard Madoff's Ponzi scheme.

"You could register all 10,000 hedge funds, and it probably would just overwhelm the regulator," he said.

Timothy Brog, portfolio manager of New York-based hedge fund Locksmith Capital Management, said stricter rules won't work properly if regulators become bogged down in policing individual funds rather than monitoring the investment products they trade. These include derivatives and mortgage-backed securities.

"It's not hedge funds that are a problem," Brog said. "The problem is the instruments they are trading. A $100 million hedge fund is not going to have a material effect on the overall market."

The outline of the regulatory plan was announced a week before President Obama was to meet for talks with the Group of 20 major industrialized and developing countries to discuss solutions to the global crisis. European countries have said the U.S., where the financial problems began, must toughen its regulatory system.

The administration's plan also includes a provision that Geithner and Federal Reserve Chairman Ben Bernanke discussed before the committee on Tuesday: to give the administration expanded powers to take over major nonbank financial institutions, such as insurance companies and hedge funds.

That power is aimed at preventing a repeat of the problems surrounding insurance giant American International Group Inc. AIG sparked a furor with news that it had distributed $165 million in bonuses to its financial products group. That unit specialized in trading credit default swaps, the derivatives that drove the company to near-collapse last fall.

The administration sent Congress a bill calling for the expanded powers to seize control of nonbank institutions late Wednesday. Frank has said this measure could win approval within weeks. And he said the administration's broader regulatory overhaul could win House approval by summer.

But Republicans wondered whether the overhaul would give federal regulators too much power.

"You're talking about seizing private businesses," Rep. Donald Manzullo, R-Ill., said to Geithner during his testimony on Capitol Hill. "You don't consider that to be radical?"

"No," the Treasury sectary said. "This is a prudent, carefully designed proposal to protect our financial system."

"Forgive me if I am a skeptic ... when I hear that if we only have a systemic regulator it will never happen again," Rep. Scott Garrett, R-N.J., told Geithner.

Sen. Charles Schumer, D-N.Y., a member of the Senate Banking Committee, praised Geithner's proposal as a "good first outline." But he said it would probably require "some major consolidating and rearranging" of regulatory agencies. Four separate agencies now regulate banks - a system critics say produces overlapping lines of authority.

At a Senate Banking Committee hearing, SEC Chairman Mary Schapiro and key senators agreed it could be harmful for any one regulator to become too powerful.

"The devil is in the details," Schapiro said, adding she was concerned that "we don't create a monolithic entity."

To try to build support for the proposal, Mr. Obama is to meet Friday with major bank executives.

The proposal on credit default swaps and other derivatives would regulate the trading far more extensively. Some derivatives, such as stock options, already are regulated because they are traded on exchanges. The administration would expand regulation to derivatives that now trade mainly in the over-the-counter market, outside regulatory scrutiny.

Credit default swaps are contracts to insure against the default of certain debt. They played a key role in the downfall of investment banking giant Lehman Brothers Holdings Inc. last fall and nearly destroyed AIG.

Larger hedge funds, private equity funds and venture capital funds above a certain level in assets would have to register with the SEC. Regulators would examine their books to determine if they should face greater scrutiny.

Hedge funds have grown explosively in recent years while operating secretively. They have lured an increasing number of ordinary investors, pension funds and university endowments - meaning millions of people now unwittingly invest in hedge funds indirectly.

[sjc_1]

The plan that Republicans should doubt is their recent 16 page brochure that they actually call an alternative budget. They could have spent the months since the election constructing a real alternative, but why spoil some good time off. When the heat comes, they just whip their staffs into some overtime producing a sham and they can pretend that they did something.

[sjc_1]

Thank you President Obama for doubling the national debt in only 59 days..
Posted by vistavermin1 at 5:22 AM

Anyone that would get up that early to post that big a lie IS obsessed.

[sjc_1]

Leave it to the right wing to front for the greed mongers. This is where all those big reelection checks come from and we can't stop any of that now can we.

[realnews12]

google "obama, approval index". And grab an umbrella.

Posted by jgg00000008 at 9:52 AM : Mar 27, 2009

Sure, anyone can find online a website which confirms their own prejudice. The realclearpolitics site tries to be fair and unbiased by looking at a broad spectrum of polls and averaging them together. Rasmussen is included (tends to be low) as is Gallup (tends to be high) - and many others. The AVERAGE of the many different polls has been holding steady for the last month. Since the inauguration, the average approval has not moved outside the 60-65% range.

[omega39-2009]

Now, I know you're slow, so please try to keep up: Just because Bush is gone does NOT mean his deeds---or in this case, misdeeds---are a thing of the past. There is no free pass just because a person is no longer in office. He cannot pardon himself, and Obama is not going to opardon him.
Posted by tj217-2009

Oh the irony of a party that makes "personal responsibility" a plank in their platform, and then accepts none of it. The legacy of the Reagan revolution is a bunch of selfish, irresponsible, overage children.

[omega39-2009]

Media and read the "real" polling of Rasmussen and Zogby who are "independent" in their polling! 35% believe we are on the "right track", with 59% believe we are headed in the "wrong direction" on this LOSER of a President Barack Obama's economic plan for this "meltdown" caused by the DumboCraps in control of Congress for the past two years!
Posted by scb1111_1 a

Dumb*ss, you should be paying attention to the trend and the "right track" trend has been increasing weekly since Bush left office.

[realnews12]

look at Obama's approval rating chart. It looks just like a waterfall.

Posted by jgg00000008 at 9:07 AM : Mar 27, 2009

Not true! Anyone can check for themselves at realclearpolitics.com. Obama's approval rating has been holding steady recently, your "waterfall"claim notwithstanding.

[rickwar98]

Posted by tj217-2009 at 8:51 AM...there is NO approval of 70% for this LOSER of a President. ABC, CBS and CNN polling is a JOKE within themselves. Rasmussen and Zogby polling has this "Nut-Case" Barack Obama at 50% Approval and 50% Disapproval after 60 days in Office?
Posted by scb1111_1 at 9:05 AM : Mar 27, 2009

Say, here is the actual headline from that poll:

"President Barack Obama's approval rating continues to slide, but the drop since Election Day isn't dramatic, said pollster John Zogby."

Additional comments regading this poll from Zogby himself:

"It's pretty remarkable that anybody's at 50-50 with how bad things are right now," Zogby said in an interview.

Obama's approval rating is the same as President George W. Bush's at the same point in Bush's first term.

"The difference is that though the economic situation wasn't great in March 2001, it was better than it is now. "

Zogby noted that his poll splits degrees of approval differently, which could contribute to the difference between his poll and others. Zogby's poll shows that 39 percent of 4,523 survey participants rate Obama's performance as poor, slightly higher than a core group of Republican voters who would never approve of a Democratic president.

The economic crisis contributes to that number, Zogby said, as well as the "warp speed" of the news cycle.

Zogby disagrees with some pundits' assessment that the president is overexposed, doing too many interviews instead of working on the economy.

"America still likes him, and this is the thing he has," he said. "They like listening to him."

OK DumbS**T care to comment on your own pollsters comments. Like I said please continue your spew, so we can laugh some more. It's pretty amusing

[rickwar98]

Posted by tj217-2009 at 8:51 AM...there is NO approval of 70% for this LOSER of a President. ABC, CBS and CNN polling is a JOKE within themselves. Rasmussen and Zogby polling has this "Nut-Case" Barack Obama at 50% Approval and 50% Disapproval after 60 days in Office?
Posted by scb1111_1 at 9:05 AM : Mar 27, 2009

Take all the polls, average them out for the far right and far left nut cases, average = 60.9 approval.

We all know it's spew when you post, so continue on, we'll just laugh some more.

[scb1111_1]

Posted by tj217-2009 at 9:11 AM...get your head out of the rear-end of these Obamanite News Media and read the "real" polling of Rasmussen and Zogby who are "independent" in their polling! 35% believe we are on the "right track", with 59% believe we are headed in the "wrong direction" on this LOSER of a President Barack Obama's economic plan for this "meltdown" caused by the DumboCraps in control of Congress for the past two years!