June 17, 2009

Economic Outlook: Regulatory ground zero

Wednesday begins the battle between the White House and Wall Street, read a headline referring to President Obama's overhaul of the regulatory system.

Inevitably, there will be turf wars between regulatory agencies and tug-of-wars between lobbyists and lawmakers. The proposals, to be unveiled Wednesday, provide plenty of opportunities for sound bites for those with deep pockets and for millions on Main Street affected by the financial meltdown.

Echoing Treasury Secretary Timothy Geithner's recent remarks on gaps in the regulatory system, Obama said Tuesday the financial system suffered from a lack of oversight, that allowed a financial crisis to develop that threatened the global economy.

The 85-page draft proposal starts with a common touch, listing Main Street as the first priority.

Americans across the nation are suffering from unemployment, failing businesses, falling home prices and declining savings, reads the proposal's second sentence. No mention of banks or credit card companies there.

Banks will have their sound bites, too.

Many of the proposals have seen some form of preliminary public debate. Included in the draft are proposals to regulate over-the-counter derivatives and create a Consumer Financial Protection Agency that monitors financial products that entangle consumers.

The Federal Reserve would be given greater power and the Treasury would be allowed to take over companies deemed too big to fail, like American International Group Inc., where a failure would threaten the entire financial system.

The proposal includes an agency swap, trading in the Office of Thrift Supervision for a new regulator to oversee financial institutions, a step aimed at curtailing the habit of banks to shop around for the least restrictive regulator.

Financial firms would also be required to hold more capital to cushion a fall during future crises.

Bankers, of course, will have months to react. Many of the proposals require Congressional approval to move forward, a step that will unravel the arguments and paste them back together. Battle or not, for bank lobbyists, Wednesday will likely be remembered as ground zero.

In midday trading in Europe Wednesday, markets edged lower with the FTSE 100 in London off 0.73 percent, losing 31.51 points to 4,297.06. The DAX 30 in Frankfurt lost 0.68 percent, 33.18 points, to 4,857.54. The CAC 40 in Paris lost 21.60 points, 0.67 percent, to 3,192.35.

In Asia, markers were mixed. The Nikkei index in Tokyo added 87.97 points, 0.9 percent, to 9,840.85. The Hang Seng index in Hong Kong Hang Seng slipped 0.45 percent, 80.90 points, to 18,084.60. The Singapore Straits Times lost 16.71 points, 0.73 percent, to 2,271.45. In Australia, the S&P/ASX lost 1.47 percent, 58.40 points, to 3,904.10.