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Treasury's Reg Reform Seen in Political Disarray

Political support for the Obama administration's regulatory reform plan is faltering, leaving many to question the Treasury Department's strategy for enactment.

Most members of the Senate Banking Committee oppose handing the Federal Reserve Board systemic risk oversight power, and the banking and asset management industry's campaign against a new consumer protection agency is gaining ground.

The Treasury's moves to reverse the momentum are not gaining much traction, according to analysts, industry representatives and banking regulators. Asked to describe the impact of Treasury Secretary Timothy Geithner's expletive-laced dressing down of federal regulators for their failure to support the plan, several said it smacked of "desperation," a "sign that this is coming off the rails."

"The meeting last Friday night was politically ineffective," said Paul Miller, a managing director of Friedman Billings Ramsey. "To me, it shows they are panicking."

In an interview, Treasury Deputy Secretary Neal Wolin defended the agency's strategy, insisting that the plan is not in jeopardy and that the political process has just begun.

"We never expected, nor would anyone expect us, to have a circumstance where we would deliver a thousand pages of legislative text and the Congress would enact it all in one month," he said. "Compared to any serious piece of legislation that has worked its way through Congress, we have crossed, at high speed, important milestones in a short amount of time."

Nonetheless, to many observers, the plan already appears splintered and in tatters.

Even strong advocates of a House bill to create a consumer protection agency have acknowledged that major issues about how it would function have yet to be resolved. Banking industry representatives said they are using the August recess to press their case that creating such an agency would be dangerous and ineffective-a talking point that has resonated with many lawmakers, including Democrats.

Several senators from both parties have also made it clear that giving the Fed systemic risk oversight is unacceptable despite Geithner's insistence that doing so is necessary. Lawmakers at a Senate Banking Committee hearing on Tuesday, meanwhile, appeared to head off each in his own direction, arguing that the Obama plan was not tough enough and that further consolidation of banking regulators is needed.

But if the Treasury is prepared to change its strategy, it is showing no sign of it.

Wolin said that the administration is committed to giving the Fed systemic risk power and that there is still time to make the case on Capitol Hill.

"At the end of the day, the actual regulation of the biggest most interconnected firms needs to be done not by a committee but by a single regulator that has accountability for achieving the results we need them to achieve, and from our perspective the Fed is the most appropriate," he said.

He said the many lawmakers could still be convinced this is the wisest course of action.

But many lawmakers appear to have made up their minds. Though banking panel Chairman Chris Dodd has publicly remained neutral, he has sharply criticized the Fed's performance leading up to the financial crisis and suggested that giving it more power would be a bad idea. Sen. Richard Shelby, the panel's lead Republican, declared Tuesday that all the mistakes during the crisis "lead to the Fed" and has flatly opposed giving it more power.

Several lawmakers have expressed support for an alternative model, a regulatory council that would oversee systemic risks. At his meeting with regulators, Geithner was said by sources to be furious that some agency heads had supported the idea publicly, including Federal Deposit Insurance Corp. Chairman Sheila Bair and Securities and Exchange Commission Chairman Mary Schapiro. Geithner reportedly demanded these regulators support the Fed.

But the meeting appeared to do Geithner little good and may have further undermined him politically. Bair reiterated her opposition to giving systemic risk power to the Fed at the hearing Tuesday, and other regulators continued to pick apart the Obama plan. Some lawmakers said Geithner's meeting was inappropriate.

Instead of making it appear that regulators were just clawing for turf-which appeared to be Geithner's goal-it was the Treasury secretary who appeared unreasonable, making demands of independent agencies not in his purview, several observers said.

"They might want to go out and buy a copy of Dale Carnegie's 'How to Win Friends and Influence People,'" said Robert Clarke, a senior partner at Bracewell & Giuliani LLP and a former comptroller of the currency. The meeting "struck me as a peculiar way to get people to go along with their program. It signals it's not going well or they are having trouble getting support."