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Obama Proposes Biggest Financial Sector Reform Since the Great Depression

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By Kevin Fayle on June 17, 2009 7:58 PM

As if banks haven't had enough to worry about recently, now the Obama administration is planning the biggest financial reform in two generations. 

In a speech today, President Obama outlined his plans for the new financial regulations scheme.  Among the changes: the administration will eliminate the Office of Thrift Supervision and place the Federal Reserve in charge of overseeing systemic risks.  The goal of the changes is to streamline bank supervision and reduce risk that could spread out from the financial sector and threaten the broader economy.
The administration will also place greater restrictions on securitized debt and over-the-counter derivative products, and will more closely scrutinize money market mutual funds, credit rating agencies and hedge funds.

The President's plan also calls for greater oversight of exotic financial markets.  In recent years, these markets have evolved too rapidly for the government to keep up.  Many analysts blame the rapid, unchecked expansion of these markets for the current state of the economy.

On the other hand, some analysts believe that the new regulations will hamper the banking sector's recovery and lead to an era of reduced profits for financial institutions.  Bank stocks were down after the announcement, and the S&P annnounced that it was cutting its rating on 18 major financial companies - partly because of the prospect of prolonged uncertainty in the face of the new regulations.

Some observers also feel that increased capital requirements under the new regulations will reduce the leveraging power of banks and lessen their ability to accept risk - two features of the modern banking system that allowed for rapid growth in years past.

But perhaps this isn't such a bad thing.  After all, the banking sector had developed into a high-risk, high-profit enterprise that greatly benefitted a small number of people until everyone realized that they had built a structure entirely devoid of supports.

We are all still feeling the resulting crash.

See Also:
What Obama's Financial Regulation Reform Annoucement Means (Huffington Post)
Obama Proposes New Financial Regulations (DealBook Blog)
Obama: Biggest Overhaul Of Bank Sector Since Depression (CNBC)
US Bank Profits Could Be Hurt By Financial Reforms: Analysts (CNBC)

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