Obama to financial sector: More regulation is coming

McClatchy NewspapersDecember 18, 2008 

WASHINGTON — President-elect Barack Obama signaled Thursday that he plans to put Wall Street on a tighter leash, saying that he'll soon unveil plans to intensify and perhaps restructure regulation of the financial sector.

"We have been asleep at the switch," Obama said at a news conference in Chicago, where he unveiled his selection of Mary Schapiro, a longtime regulator, to head the Securities and Exchange Commission, which oversees finance.

He criticized Wall Street greed, saying that "there needs to be a shift in ethics" and adding that "everybody from CEOs to shareholders to investors are going to have to be asking themselves, not only is this profitable, not only whether this will boost my bonus, but is it right? Does it conform to some higher standards, in terms of how we operate?"

Also on Thursday, Obama tapped a strongly pro-union California congresswoman, Democrat Hilda Solis, as his labor secretary.

The president-elect was expected to announce Solis' selection at a news conference Friday along with his pick of former Dallas Mayor Ron Kirk to be U.S. trade representative. McClatchy previously reported Kirk's selection.

Obama said Thursday that "one of my earliest initiatives" would be overhauling how the federal government polices Wall Street. He said that his economic team was preparing a detailed plan for how to introduce tougher regulation of the financial services sector.

Weak regulation was a major factor behind the collapse of mortgage finance last year, which unleashed a housing crisis and a deep freeze in credit markets, tossing the world's largest economy into recession.

As problems worsened early this year, loosely regulated investment banks collapsed, were forced to merge with commercial banks or changed their status to bank holding companies in order to get federal bailout money, which comes with tougher regulation.

In another black eye, the SEC confirmed this week that it had ignored warning signs about renegade financier Bernard Madoff, who allegedly bilked investors of $50 billion.

Obama said he blamed not just regulatory agencies but also "some of the congressional committees that might have been taking a look at this stuff. We have not been aggressive, and we've had a White House that started with the premise that deregulation was always good."

The selections of Schapiro and Solis begin a shift by Obama from the free-market policies that the Bush presidency embraced.

After decades of deregulation by Democrats and Republicans alike, the pendulum is shifting back to regulation. Treasury Secretary Henry Paulson issued his own blueprint earlier this year, calling for the SEC and the Commodity Futures Trading Commission to merge because of overlapping functions. The SEC focuses on stock and bond trading, while the commission concentrates on commodities markets.

As for his new appointees, Kirk has been a strong advocate of free trade, including the North American Free Trade Agreement. Labor leaders say that NAFTA has hurt American workers, and Obama reassured unions during his campaign that he'd demand new environmental and labor protections in that and other agreements.

Solis, who represents a heavily Latino district in the Los Angeles area, has been a critic of free-trade deals.

AFL-CIO President John Sweeney said that Solis had a 97 percent favorable voting record with the trade union group, and he issued a statement saying that his members are thrilled and are confident that she'll return the Labor Department's priorities to defending workers' rights.

To unions in recent years, this has included a push to make it easier for workers to organize new unions.

In Schapiro, Obama tapped someone who knows both the SEC and the Commodity Futures Trading Commission. She was an SEC commissioner from 1988 to 1994, and the chairman of the commission from 1994 to 1996.

Obama seemed to endorse the idea of merging the two agencies, citing "the need to potentially consolidate some of the regulatory agencies that are there, to streamline them, to make clear who's got what mission so that things aren't falling through the cracks."

One of the first turf battles that Obama, Schapiro and Gary Gensler, the Commodity Futures Trading Commission chairman designee, must resolve is who regulates credit-default swaps, which have contributed to the nation's near meltdown of financial markets.

These insurance-like financial products are an unregulated market that's worth trillions of dollars, and they were at the center of the September collapse of insurer American International Group.

Gensler was a treasury undersecretary in the Clinton era and is a former partner at investment giant Goldman Sachs. Some analysts think that Goldman helped drive up oil prices earlier this year with gloomy forecasts of $200 a barrel, to the benefit of its own commodities index funds.

Schapiro heads the Financial Industry Regulatory Authority, a nongovernmental, industry-supported regulator that oversees the securities industry with an eye toward investor protection.

"She does take regulation seriously. She does believe there's a need to police the markets. She is not the most radical proponent of that view he could have found," said Barbara Roper, the director of investor protection for the Consumer Federation of America, a consumer rights group.

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