It was clear that broader oversight of the financial industry was on the horizon, even before the winner of Tuesday's U.S. presidential election was known.
But after Democrat Barack Obama's landslide victory over Arizona Republican John McCain, the Illinois senator's plan to streamline the financial regulatory system and tighten the reigns of control will soon begin to take shape. And now that his party has gained stronger majorities in both houses of Congress, there won't be much standing in his way.
"There's likely to be greater regulation," says Richard Clemens, a fellow at the Center on Federal Financial Institutions, a nonpartisan public policy institute. "And that could have happened regardless of who won the election, but I think because Obama won and because the Democratic majority were strengthened, it's likely to be more regulation than if the Republicans had won."
Still, Clemens, who represented financial firms in regulatory cases as a senior partner at Sidley Austin, is quick to note he does not "think it will go to extremes."
Obama seems to be planning what he often refers to as a "common-sense" approach to modernizing the regulatory system and cracking down on agents of malfeasance that fueled the current crisis. Some elements of his plan are sure to give pause to industry insiders who fear that Obama and his Democratic colleagues will pull the regulatory reigns in too tight. Those include compensation caps, less favorable tax laws for corporations and the wealthy, and greater scrutiny of practices and assets that had largely been unregulated.
But more broadly speaking, Obama outlined a comprehensive plan, with six key elements, to restructure the financial regulatory system during a speech at Cooper Union in March, shortly after the collapse of
first rocked the markets. While the world has changed dramatically since then -- with the demise of several more firms, the spread of economic decline at home and across the globe, and a plunge in the global markets -- all of his points remain relevant and are still on the table, according to experts.
Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a lobbying group, expects Obama to add consumer protections, modernize and strengthen the regulatory structure, tighten credit standards and begin delving into areas that haven't been regulated before.
are "right at the top of that list," Talbott says. He also predicts a "systemic-risk czar" of sorts. Obama alluded to a similar concept last spring, proposing a Financial Market Oversight Commission, which would advise him, Congress and regulators on systemic risks that threaten to destabilize the financial markets.
Another key element of Obama's plan is to centralize supervision of financial institutions from the plethora of governing bodies that exist today: the
, Treasury Department, Office of Thrift Supervision, Comptroller of the Currency,
Securities and Exchange Commission
and Commodity Futures Trading Commission, as well as the Federal Housing Finance Agency, which oversees
. Those don't include state-level regulators that oversee insurance companies.
The problem, says Mark T. Williams, a professor of finance and economics at Boston University, is that massive companies that provide all sorts of financial services in various markets answer to several governing bodies. There is no single, key authority to oversee the entire firm, allowing risk to slip through the regulatory cracks. He adds that holding one regulator accountable for oversight would also help to ensure that agencies are rewarded for good oversight practices and penalized when oversight is lacking.
"The challenge here was not that we didn't have enough regulators," says Williams, a former examiner at the Fed. "We had at least four layers of regulators at multiple levels, which created at-the-seams-risk. The focus now has to be on how to better coordinate these efforts to ... eliminate the redundancy."
While Obama has not said whether he would eliminate any of those institutions -- or which may be on the chopping block -- he vowed to remove the overlaps and competition among the many regulators. The Fed is one agency that probably will be granted broader powers under his plan, particularly to supervise any institution that borrows its funds. He also pledged to coordinate with international groups -- such as the Basel Committee, the International Accounting Standards Board and the Financial Stability Forum -- to ensure that institutions are operating under the same standards across the globe.
Clemens notes that the Financial Services Authority, which oversees all financial institutions in the U.K., may be one model for a restructured U.S. banking regulator. While the U.K. also has a central bank similar to the Fed, the FSA oversees everything from deposits and housing to insurance and stocks. Simply adding a systemic-risk body without whittling down the other overlapping bodies "could be confusing and not have the most coherent system if you have several regulators covering the same matter," Clemens adds.
Another important goal of Obama's plan is to ensure that firms are regulated for "what they do, not what they are." He noted that while banks and thrifts were subject to mortgage underwriting guidelines, mortgage brokers and other companies that originated soured loans were not. He mentioned other comprehensive reforms to protect consumers from predatory lending, some of which has already started to be addressed by Congress or the Fed.
None of Obama's ideas are shocking or particularly unique. Treasury Secretary
in March proposed many similar reforms shortly after Obama's speech. But some are worried that after decades of lax oversight, regulators under a Democratic government will go overboard. The crisis for banks was preceded by the start of the housing bubble's decline, and as Obama noted in March, "What was bad for Main Street turned out to be bad for Wall Street. Pain trickled up."
Regulators have already taken unprecedented steps to resolve the financial crisis, engineering a bailout or support system for a wide range of top financial names, including Fannie, Freddie and
, to stronger banking behemoths like
Bank of America
, which were pushed into accepting federal funds in exchange for preferred stock.
While the sense of urgency has been ameliorated, now that the $1 trillion rescue package has been approved, the funds will not come without regulatory strings attached.
Williams notes that over-regulating banks may increase costs and blunt their competitive edge. But, he adds, the regulatory pendulum does not have to swing completely to the opposite end of the spectrum. Instead, he advocates for more specialized examiners, with training and tools to evaluate banks' risk-taking activities.
"It's very popular to say now, 'We need more regulation to solve the problem,'" says Williams, "but I would argue we need smarter regulation."