Test awaits Obama this week on financial reforms

By Kevin Drawbaugh
WASHINGTON (Reuters) - The Obama administration on Wednesday will unveil its long-awaited plan to tighten U.S. financial regulation, marking a test of its resolve to seize political opportunity and face down powerful interests.
Banks and financial firms are pushing hard in Washington to soften the plan, which has been under debate for six months in response to a severe credit crisis and a deep recession that is already going a long way toward reshaping capital markets.
Political realities on Capitol Hill, where the industry is deeply entrenched and lawmakers protect their turf, have already tempered some approaches for bringing the antiquated U.S. regulatory system into the 21st century.
Treasury Secretary Timothy Geithner is scheduled to testify in congressional hearings about the plan on Thursday.
In the short-run, the plan's substance will be less important than the appearance it creates, analysts said.
"In this environment ... regulation is not an industry issue. It's a political issue. The government needs to be seen as responsive and doing something," said Dushyant Shahrawat, senior research director at research firm TowerGroup.
Months of debate on the details lie ahead, with time on the side of the status quo, especially if the economy continues to improve and public outrage begins to fade. Republicans last week proposed more modest reform proposals.
In the long run, whatever changes get made, investors shouldn't expect the bulls and bears of the market to be tamed, although the financial system will likely be warier of risk, more transparent and more stable for a time, analysts said.
Financial leverage is already down sharply, while a massive dose of skepticism about asset values has been injected into banking, and financial executives are likely keen, for now, to avoid more embarrassing testimony before Congress.
"I'm not willing to say that that will continue on endlessly," Shahrawat said. "Firms have a bad habit of going back to old habits. But at least for the next three to five years, I don't think" risk will be as big an issue.
SEC, CFTC SURVIVE
One example of the administration's partial retreat from earlier reform intentions has to do with existing regulatory agencies -- such as the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Reorganizing these bureaucracies was once seen as vital to closing gaps in oversight and blocking financial firms from shopping around for the least strict regulator. For instance, American International Group was under the jurisdiction of the Office of Thrift Supervision, a savings-and-loans overseer, when the giant insurer was bailed out by taxpayers.
But no top-to-bottom agency overhaul will be proposed, said sources familiar with administration discussions.
The White House and congressional leaders have decided that such a move is not politically feasible, given opposition in the industry and division among committees of Congress that don't want to lose their oversight of the SEC and CFTC. Continued...
Source: Reuters