President Obama reversed decades of lax oversight of the financial industry Wednesday by signing a landmark overhaul of regulations, but he still faces a major task — appointing a director for the powerful new agency charged with protecting consumers from unscrupulous deals.
The law dramatically toughens oversight of the industry, from Wall Street’s executive suites to the Main Street storefronts of mortgage brokers and payday lenders.
But it is the Consumer Financial Protection Bureau that will have the most direct effect on average Americans by creating rules to help ensure that bankers and other financial firms treat their customers fairly.
Even before Wednesday’s signing, a battle was brewing over who should be the bureau’s first director. That appointee will head an agency with an annual budget of about $450 million, hundreds of employees and authority to write and enforce new rules for mortgages, credit cards and other consumer products.
A leading candidate is Elizabeth Warren, a Harvard law professor and chairwoman of the watchdog panel overseeing the $700-billion Troubled Asset Relief Program, the bailout fund for the financial industry. But her outspoken consumer advocacy and sharp criticism of some TARP spending has made her a controversial figure who could have trouble getting confirmed for the job.
Warren, an expert on bankruptcy law and consumer debt, was the first to propose the idea of a consumer agency in an academic journal article in 2007. And she has been one of its most outspoken advocates as President Obama adopted the idea and pushed it into law.
Other potential candidates are Michael Barr, assistant Treasury secretary for financial institutions; Martin Gruenberg, vice chairman of the board of the Federal Deposit Insurance Corp.; and Gene Kimmelman, an official in the Justice Department’s antitrust division.
The sweeping new law reverses three decades of financial deregulation that many experts believe set the stage for the financial crisis in 2008. To prevent a repeat, the bill enacts the most sweeping clampdown on the industry since the creation of the Securities and Exchange Commission and the FDIC in the 1930s.
Besides creating the consumer bureau, the bill establishes a council of regulators to monitor the financial system for major risks; imposes tough regulations on complex financial securities known as derivatives; grants shareholders a nonbinding vote on executive compensation; and gives the government authority to seize and dismantle teetering firms whose failure would pose a danger to the economy.
On Wednesday, Obama put the spotlight on consumers in a speech before the signing, touting changes that, for instance, end hidden fees in mortgages and mandate easier-to-understand financial disclosures.
“All told, these reforms represent the strongest consumer financial protections in history,” Obama said. “And these protections will be enforced by a new consumer watchdog with just one job: looking out for people — not big banks, not lenders, not investment houses.”
Warren echoed the president: “For the first time, families will have a tough, independent cop in Washington to help clear out the tricks and traps hidden in consumer credit agreements.”
But asked after the signing ceremony if she wanted that job, Warren would not comment.
Meantime, MoveOn.org and other liberal groups are eagerly backing Warren, and Democrats in the House and Senate are circulating letters of support.
“Professor Warren’s appointment would make clear that under President Obama’s leadership, there truly will be accountability for Wall Street and fair treatment for the American public in the financial marketplace,” AFL-CIO President Richard Trumka said this week in pushing for her nomination.
But she is not a favorite of the financial industry. Though not publicly criticizing Warren, business leaders have privately raised concerns about her consumer activism and lack of bureaucratic experience.
Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said this week that there was “a serious question” about whether Warren could be confirmed by the Senate, where 60 votes would be needed to overcome an expected Republican-led filibuster.
Many Republicans opposed the agency’s creation in the first place, saying it could lead to tighter credit. And some view Warren as too much of a consumer activist to take the five-year position, which comes with broad power and little congressional oversight.
Sen. Richard Shelby (R-Ala.), the top Republican on the Banking Committee, said Wednesday that he would not support Warren’s nomination.
When the House Financial Services Committee drafted its version of the legislation, it rejected an amendment by Rep. Scott Garrett (R-N.J.) that appeared designed to prevent Warren from heading the agency. His proposal would have required the agency’s director to have at least a year of experience working for a financial services company or a banking regulatory agency.
“This agency would have the potential for limiting credit availability and limiting consumer choices,” Garrett said. “Put somebody in there who has all but established that as her agenda, and you just amplify the magnitude in a negative manner that this agency can have on the economy.”
Republicans aren’t Warren’s only potential problem. She has ruffled feathers at the Treasury Department as chairwoman of the TARP panel. In that job, she aggressively questioned Treasury Secretary Timothy F. Geithner and other officials about the use of the money.
“She’s been an outspoken critic of the TARP program, which has been largely administered by Secretary Geithner, so I don’t think it’s surprising that he would not be her biggest fan,” said Jaret Seiberg, a financial policy analyst at Concept Capital’s Washington Research Group.
“She takes intellectual credit for the concept of a consumer financial protection agency. Whether she’s the best candidate to lead it, I think there are a lot of questions,” Seiberg said.
A Treasury spokesman said Geithner believed that Warren “is exceptionally well qualified” and would support her nomination. Obama and other top administration officials also have praised her contribution to the legislation and her abilities.
“Elizabeth Warren is a great, great champion for consumers and middle-class families across the country,” White House senior advisor David Axelrod said. “So she’s obviously a candidate to lead this effort.”
Obama acknowledged her efforts Wednesday after signing the legislation by stepping down from the podium and personally congratulating Warren and other key supporters of the legislation.