Two key components of the Obama administration's bold plan to reshape U.S. financial regulation came under attack on Wednesday, with lawmakers and lobbyists engaged in a reform debate of immense scope.
An informal panel of market experts issued a report in New York calling into question a core piece of the administration's plan -- putting the Federal Reserve in charge of monitoring big-picture, or systemic, financial risk in the economy.
The Fed is too tarnished and distracted by other duties to handle such a job, said the Investors' Working Group of big money management firms and two ex-chairmen of the Securities and Exchange Commission, William Donaldson and Arthur Levitt.
The report came amid growing skepticism on Capitol Hill about assigning the Fed systemic risk regulator duties, although the administration remains committed to the approach.
At the same time, the top financial reform architect in the U.S. House of Representatives defied the administration over its proposal to eliminate the federal thrift charter, the legal statute underlying the U.S. savings and loan industry.
Democratic Representative Barney Frank, chairman of the House Financial Services Committee, said the thrift charter should be altered, but not scrapped entirely.
Frank's stance on the thrift problem will greatly influence its solution.
Months of discussion and deal-making over such issues lie ahead for the Obama administration's plan, with changes to its original proposals seen as certain, alongside efforts to reconcile it with a parallel reform effort under way in the European Union.
But on Wednesday, with stock markets surging on hopes of recovery from a recession in its 19th month, parts of the Obama plan were already changing segments of the financial industry.
STUDENT LOAN CHANGES
Representative George Miller, chairman of the House education committee, was set to introduce legislation on Wednesday that would overhaul the $92 billion student loan market along lines already proposed by the administration.
Miller, mirroring Obama's plan, wants to eliminate the Federal Family Education Loan Program (FFELP), a government program that once furnished handsome profits for lenders such as Sallie Mae and Student Loan Corp.
We believe the odds are north of 75 percent that Congress will eliminate the FFELP program, said Jaret Seiberg, financial services policy analyst at Concept Capital.
Student lending companies were largely resigned to the likelihood that the FFELP will end and have been adjusting their business models to a future in which they will service direct loans to students from the U.S. Education Department.
Similarly, credit card companies were moving to accommodate reforms to their practices that President Barack Obama signed into law in May and which begin to take effect next month.
On another front, hedge fund officials told a Senate panel in a hearing on Wednesday that they largely support Obama's proposal to require hedge fund advisers to register with the SEC -- a potential sea change for the hedge fund sector.
A modernized financial regulatory system ... will include appropriate regulation of hedge funds and other private pools of capital, said famed hedge fund manager James Chanos, head of Kynikos Associates.
However, Mark Tresnowski, managing director and general counsel of private equity firm Madison Dearborn Partners, said more regulation for private equity firms is arguably unnecessary.
Speaking on behalf of the Private Equity Council, a lobbying group, he said registration would result in new regulatory oversight for many private equity firms and would particularly impact smaller firms.