Last Updated Sep 14, 2009 1:26 PM EDT
Obama travelled to Wall Street to make a strong pitch for Congress to implement his package of financial reforms, which include a consumer financial protection agency and a systemic risk regulator.
Speaking at Federal Hall, where George Washington was inaugurated as president, Obama said the economic crisis is slowly improving. "Although I will never be satisfied while people are out of work and our financial system is weakened, we can be confident that the storms of the past two years are beginning to break. In fact while there continues to be a need for government involvement to stabilize the financial system, that necessity is waning." In fact, equity markets have gained sharply since March and the number of newly unemployed each month is declining.
Obama won applause only once during his speech - when he talked about the creation of the consumer protection agency. But he also warned Wall Street to heed the lessons of Lehman's failure and the crisis that followed. "We will not go back to the days of reckless behavior and unchecked excess at the heart of the crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses," Obama said. "Those on Wall Street cannot resume taking risks without regard for consequences and expect that the next time, American taxpayers will be there to break their fall."
Obama noted that while the FDIC was in place to protect depositors at banks, "we don't have any kind of process in place to contain the failure of a Lehman Brothers or AIG or any of the largest and most interconnected financial firms in our country." Obama's speech came on the one year anniversary of the failure of investment bank Lehman, which was followed by an $85 billion rescue of insurer AIG a day later.
Obama noted that his administration has proposed the creation of a "resolution authority" to handle the failure of major financial institutions. "This is intended to put an end to the idea that some firms are too big to fail," he said. "For a market to function, those who invest and lend in that market must believe that their money is actually at risk. And the system as a whole isn't safe until it is safe from the failure of any individual institution."
Obama added that "we've got to close the loopholes that were at the heart of the crisis." Among them, he said, were financial firms shopping for the regulator of choice, hedge funds that are unregulated and financial instruments like derivatives which were not examined for risks.
He said the one of the main reasons for the crisis was that many agencies and regulators were responsible for oversight of individual firms but "no one was responsible for protecting the system as a whole." He said that under his proposed reforms, the Federal Reserve will be fully accountable for regulating the largest, most interconnected firms. An oversight council will be created to bring together regulators and share information, identify gaps in regulation and handle issues that don't fit in any regulator's normal duties. Obama has already encountered hostility to his call for reforms from Wall Street and from many of the individual agencies whose jobs would be curtailed by the new regulatory system.
"The only way to avoid a crisis of this magnitude is to ensure that large firms can't take risks that threaten our entire financial system, and to make sure they have the resources to weather even the worst of economic storms."