Consumer watchdog idea hit as Congress eyes reform

Geithner's call for reform
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By Kevin Drawbaugh
WASHINGTON (Reuters) - Republicans lined up with the banking industry on Wednesday in attacking a Democratic proposal for a new U.S. Consumer Financial Protection Agency at a congressional hearing focused on a key component of the Obama administration's broad plan for financial regulation reform.
As Congress intensified its scrutiny of the Obama plan, Republican members of the House Financial Services Committee questioned the idea of splitting consumer protection from government oversight of the banking business' health.
"The wisdom of bifurcating consumer protection and safety and soundness regulation as is done in the administration's proposal is questionable," said Representative Spencer Bachus, the top Republican on the House committee.
But Democrats and supporters of creating a new agency replied that decades of combining those two roles -- within the Federal Reserve and elsewhere -- have failed to protect consumers from confusing and deceptive lending by banks.
"This structure has not worked," said Elizabeth Warren, a Harvard Law School professor who is also chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program (TARP) set up last year to bail out distressed banks.
She urged lawmakers to set up a new, independent agency to protect consumers from "tricks and traps" set by banks.
President Barack Obama last week unveiled a sweeping package of reforms to rewrite the rules for banks and capital markets in response to a severe financial crisis that has dragged down economies worldwide for more than a year.
Representative Barney Frank, chairman of the House committee, said at the hearing that he expects the panel to write legislation next month on the proposed consumer agency, while also addressing several other reform proposals.
He told reporters outside the hearing that he tentatively expects the committee to be handling "anywhere between four and six" bills on financial reforms that would then "all go on the floor of the House in one bill."
Obama wants to enact new laws by the end of the year. Democrats have consistently said that could be done, although some analysts foresee debate on the matter running into 2010.
SUBPRIME MORTGAGES
A key issue in the financial crisis that engulfed the U.S. economy last year was the enormous amount of debt shouldered by Americans during a real estate bubble fueled by subprime mortgages that many borrowers could not afford or understand.
As defaults and foreclosures rose last year, exotic financial instruments backed by shaky mortgages broke down and the capital markets froze for a time amid sudden uncertainty about the condition of banks' balance sheets.
The combined effects helped drag the United States into a recession that continues.
The $700 billion TARP and other bailout programs have helped save the banks the problems they created for themselves. Now the administration is pushing for changes in regulation designed to prevent such issues from recurring. Continued...
Source: Reuters