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Lower Taxes, Consumer Protection Among Obama's Promises

Asset management executives should have no illusion about the direction Sen. Barack Obama would take financial services policy if he were elected president.

The presumptive Democratic nominee backs a detailed list of programs aimed at protecting consumers and clamping down on lending practices, from an interest rate cap on high-cost loans to a foreclosure prevention fund paid for by lenders.

"There is no question but that a President Obama will be substantially more with consumers than President Bush has been, because, in effect, this administration did nothing to protect financial consumers during its time in office," said Daniel Tarullo, an economic adviser to Sen. Obama.

A veteran of the Clinton White House and the State Department who now teaches at the Georgetown University Law Center, Prof. Tarullo said industry executives may be more receptive to Sen. Obama's consumer-minded approach in light of the turmoil in the credit markets.

"If you're sitting as a banker right now, you cannot be entirely happy with the end to which this unregulated environment has led," Prof. Tarullo told American Banker. "Banks and all financial institutions are suffering as a result. The harm has trickled up in this case. Sound consumer regulation can make for very good business and make for good, prudential practices."

As Obama laid claim to the Democratic nomination last week, other news reports touted his taxation policies as being more egalitarian than those of Republican front-runner John McCain.

Tarullo, for his part, characterized Obama as a quick study on financial services, citing his early support of efforts by Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank to empower the Federal Housing Administration to help struggling homeowners.

Sen. Obama's $10 billion foreclosure prevention fund, designed to help troubled borrowers sell their home or restructure an unaffordable loan, would be funded by penalties on lenders who commit fraud. The presidential candidate envisions new disclosures that would help borrowers compare mortgage products, and he would confront mortgage fraud by beefing up reporting, increasing funding for enforcement and raising fines.

The Illinois Democrat would also let bankruptcy judges modify mortgage terms, and he would encourage banks and credit unions to make short-term, small-dollar loans to provide underserved consumers with alternatives to payday lenders. His proposed 36% rate cap is directed at the payday industry.

Prof. Tarullo said financial institutions should not fear an Obama presidency, since the candidate would consider the trade-offs involved in any policy choice.

Fund executives and bankers "may or may not agree with a position" taken by Sen. Obama, "but they can be assured that he will have an understanding of the costs and benefits of any particular approach," the adviser said.

To illustrate the point, he cited a March 27 speech at New York's Cooper Union in which Sen. Obama spoke at length about reforming the patchwork of financial regulation. The speech, delivered four days before the Treasury Department released its blueprint for reform, went further in some areas than the administration did.

For instance, Sen. Obama proposed giving the Federal Reserve Board clear supervisory authority over any institution that borrows from the central bank, extending its capital and liquidity rules to investment banks. The Treasury plan, by contrast, would establish the central bank more as a monitor of market stability than as a direct supervisor.

Sen. Obama also would create a public-private commission of experts to warn Congress and the White House about emerging systemic risks in the markets.

The Treasury blueprint "is thinnest on some of the substantive regulatory issues," Prof. Tarullo said. "It doesn't talk at all about capital and liquidity regulation, which are at the heart of the problem, [and it] appears not to contemplate ongoing regulation of systemically important [nonbanks]. There's an implication that somehow you can just have monitoring of some sort."

Sen. Obama has said the United States should work with the Basel Committee on Banking Supervision in the area of capital standards, an unusual topic for a campaign speech but an area of expertise for Prof. Tarullo.

"The fact that he focused" on regulatory reform and "talked about things that one normally doesn't see presidential candidates talk about reflects his commitment toward change" in the regulatory system, the adviser said. "I frequently find, and not just with bankers but with people in industry generally, that one of their biggest concerns is that the position they're in, in the markets, is not understood by regulators or political figures or others. As I have learned with Sen. Obama, he is both an incredibly voracious consumer of information about all things, including the economy, and a very quick study."