Washington is asking some painful questions about how to prevent the next financial meltdown. Should it reinvent the Federal Deposit Insurance Corporation? Abolish the seemingly feckless overseer of savings and loans? Grant new powers to the Federal Reserve?
All that — and more — is on the table as the Obama administration prepares to overhaul the regulatory apparatus that failed to prevent the gravest economic crisis since the Depression. Under consideration is a new agency to regulate mortgages and credit cards, as well as tighter federal oversight of hedge funds and insurance. One possibility is creating a regulator to watch over companies that might put the financial system in peril again should they run into trouble.
The plan, a central plank of the administration’s response to the current crisis, has already provoked a fierce lobbying battle by the various financial services industries that it could touch. The Treasury Department aims to complete the effort by mid-June, and senior Democrats in the House and Senate have vowed to complete legislation by the end of this year.
One radical proposal — combining the four federal agencies overseeing banks and savings and loans into a single, super-regulator — already seems to be losing favor, lawmakers and policy makers said. But there is a growing consensus that one of the four, the Office of Thrift Supervision, which was responsible for oversight of the American International Group, should be eliminated as part of an effort to streamline oversight.
Senator Christopher J. Dodd of Connecticut, the chairman of the Senate banking committee, and Representative Barney Frank of Massachusetts, his counterpart at the House Financial Services Committee, said they would be surprised if the Obama plan called for folding four bank regulatory agencies into one.
“I don’t mind overlap as much as the idea of concentrating too much power in the hands of one agency, like the F.S.A. in London,” Mr. Dodd said, referring to the Financial Services Authority, the British agency that Parliament in 2000 created out of six other agencies as the sole financial regulator. “The Department of Homeland Security makes me nervous for that very reason.”
Mr. Frank said the idea of a single agency “would be a good one if you were starting from scratch.” But he said it simply wasn’t “worth the political cost” that it would inevitably entail.
Senator Charles E. Schumer of New York, another senior Democrat in regular discussions with the administration, said there appeared to be a consensus among senior officials that there were too many bank regulators, but the debate in recent days had centered on whether it was politically wise to propose a plan that might face significant opposition in Congress.
“The question is whether they should put down the ideal plan and whether they should make the political compromises before they issue the plan or after,” Mr. Schumer said. The administration has been strongly considering abolishing the O.T.S., which regulates savings associations. (The O.T.S. was the primary federal regulator for A.I.G. because the company bought a small savings association a decade ago.) Its elimination was proposed last year by Treasury Secretary Henry M. Paulson Jr. and the idea has gained political currency since then.
“The Office of Thrift Supervision has very little political support given its track record,” Mr. Schumer said.
A merger of two other federal agencies — the S.E.C. and the Commodity Futures Trading Commission — would face fierce political resistance. In recent years, both agencies have been accused of weak oversight. But the industries regulated by the agencies have traditionally opposed a merger, and the Congressional committees with jurisdiction over each agency historically have been reluctant to cede any authority.
Mr. Frank and Mr. Dodd said they expected the House would move first on legislation and could complete a package of measures by the August recess, which would then go to the Senate for consideration. Unlike many other measures, regulatory overhaul does not break along party lines as much as along regional lines. The views of lawmakers from states with big banks and financial institutions often differ from those with smaller institutions.
A central goal of the plan is to more tightly control companies that are now largely unregulated but could pose risks to the financial system if they failed, such as hedge funds. Under the proposal, hedge funds would be required to register with the S.E.C. and provide access to their books. Many hedge funds already do so.
Administration officials were considering this week how to resolve many of the crucial details of the plan, such as whether the umbrella regulator for systemic risk should be the Federal Reserve alone, as Timothy F. Geithner, the Treasury secretary, had previously suggested, or whether it should be a council of regulators.
Another difficult and unresolved question is how the federal government should more aggressively regulate insurance companies, which are now exclusively under the supervision of a patchwork of state agencies.
As part of its overhaul, the Obama administration announced three weeks ago that it would seek new authority over the complex financial instruments known as derivatives, which were a major cause of the financial crisis and have gone largely unregulated for decades. While some in Congress are pushing for tougher oversight, the financial industry is lobbying hard against it, arguing that too much regulation would thwart financial innovation. On Thursday, Gary Gensler, the new chairman of the C.F.T.C., is expected to provide more details about that proposal at a Senate Agriculture Committee hearing.
For years, the debate over how to regulate such instruments has been mired in disagreement between the C.F.T.C. and the S.E.C., reflecting the rivalries between markets in Chicago and New York. But officials said this week that Mr. Gensler and Mary L. Schapiro, his counterpart at the S.E.C., had reached an informal understanding that would enable their respective agencies to share authority over the derivatives market.
The understanding, which the regulators hope Congress will ultimately ratify, would essentially give the S.E.C. authority over derivatives that are related to publicly traded securities and other instruments under the S.E.C.’s jurisdiction, such as credit-default swaps, while the C.F.T.C. would oversee commodities-based derivatives, the officials said.