On June 17, 2009, the Obama administration issued a "white paper" which proposes a sweeping reorganization of financial-market supervision. The plan would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded.

Key pieces of the proposal include expanding the powers of the Federal Reserve to oversee the country's largest financial firms, granting the government the power to dismantle important companies that fall into trouble and creation of a new regulator for consumer-oriented financial products. The proposals also seek to overhaul the business of selling investments made from mortgage loans by requiring increased disclosures about asset backed securities and requiring credit rating agencies to disclose more information about their methodology in rating such securities.

With respect to regulation of financial firms, the administration proposes:

  • A new Financial Services Oversight Council to identify emerging systemic risks;
  • New authority for the Federal Reserve to supervise all financial firms that could pose a threat to financial stability, even those that do not own banks;
  • Stronger capital and other standards for all financial firms;
  • A new National Bank Supervisor to supervise all federally chartered banks;
  • Elimination of the federal thrift charter; and
  • The registration of advisors of all hedge funds and other private pools of capital with the SEC.

With respect to supervision and regulation of the financial markets, the administration proposes:

  • Enhanced regulation of securitization markets, including new requirements for transparency, stronger regulation of credit rating agencies, and a requirement that issuers and originators retain a financial interest in securitized loans;
  • Comprehensive regulation of all over-the-counter derivatives; and
  • New authority for the Federal Reserve to oversee payment, clearing and settlement systems.

With respect to consumer protection, the administration proposes:

  • A new Consumer Financial Protection Agency ("CFPA") to protect consumers from unfair, deceptive and abusive practices;
  • Stronger regulations to improve the transparency, fairness and appropriateness of consumer and investor products and services; and
  • Higher standards for providers of consumer financial products and services.

The white paper also calls for revisions to the Federal Reserve's emergency lending authority to improve accountability and for increased oversight of global financial markets and coordination of supervision of internationally active firms.

There are substantial concerns that arise out of the Obama Administration's proposals, and this Alert cannot begin to address them all here. By way of example, with respect to just the new CFPA, we expect substantial turf battles over inter-agency authority, and the lack of federal preemption will create a myriad of problems as financial institutions attempt to comply with what may well be conflicting CFPA and state regulations. There are sure to be many other objections to the administration's proposals as legislation is introduced to effect the changes called for in the white paper. We will issue subsequent Alerts to keep you abreast of any such legislative action.

A copy of the white paper is attached.