A Sneak Peek at the President's Plan For Shoring Up The Economy
Monday, June 15, 2009SUSIE GHARIB: From Wall Street to Washington, the talk today was about President Obama's proposals to overhaul the financial system. He's expected to unveil on Wednesday new reforms designed to create a more stable financial system and to prevent a repeat of the financial crisis. The plan includes giving the Federal Reserve greater authority and raising capital requirements for financial firms. It also calls for stronger frameworks for consumer and investor protection. We have two reports tonight, looking at the effect on the financial sector and what the changes could mean for the American public. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: As the Obama administration readies to revamp financial regulations, financial services firms are already sweating the potential impact. The most severe financial crisis since the great depression has made profits rare at many major financial institutions. And if the president has his way with financial system reforms, Morningstar analyst Jim Sinegal says banks' potential earnings power may be hampered in the future.
JAMES SINEGAL, EQUITY ANALYST, MORNINGSTAR: A lot of banks in recent years have benefited from excessive leverage, some of the new financials products, securitization, CDOs things like that. If those things are severely curtailed, the profitability of a lot of banks will be hurt.
PRATT: Before the financial crisis rocked Wall Street, financial firms were fairly steady profit engines. In the five years leading up to the collapse of Lehman Brothers, the financial sector posted average quarterly profit growth of 16 percent. While analysts are hesitant to guesstimate how the reforms will affect earnings, some predict profits will grow at a slower clip.
SINEGAL: I don't think we're going to see 15 percent earnings growth going forward. I think a lot of that was from the new products that are actually already gone.
PRATT: But other Wall Street pros think the potential impact of increased regulation will be less onerous for many financial firms. Investment strategist Jim Awad says giving the financial system a facelift will make many financial stocks more attractive.
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: The kind of regulation that they're talking about would smooth the earnings and give higher quality earnings to financial institutions and actually make them sounder investments, not quite as juicy on the upside, but sounder long- term investments on a risk adjusted basis.
PRATT: Experts say the bottom line for financial firms is less risk usually equals less profits, but it could also mean greater stability for the overall economy, which in turn could help their profitability. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Dhue in Washington. U.S. households are up to their eyeballs in debt. The average family owes 130 percent of annual income. Consumer advocate Travis Plunkett says a financial product safety commission would protect consumers from unscrupulous lenders.
TRAVIS PLUNKETT, LEGISLATIVE DIR., CONSUMER FED. OF AMERICA: What we've seen in the last three years is that unsafe credit products were the spark that lit the financial crisis we're in now. So if you want to protect against this kind of so-called systemic risk, first protect consumers.
DHUE: Like the FDA approves drugs based on safety and effectiveness, a Federal regulator would review existing financial products and approve new ones based on safety and sustainability. That would include mortgages, credit card offers and other loans. The banking industry opposes the move. Wayne Abernathy who represents the banks says a new regulator is unnecessary.
WAYNE ABERNATHY, EXEC. V.P., AMERICAN BANKERS ASSOCIATION: We already have a very deep set of regulatory programs in place, very deep set of consumer protections. And yet the problems year after year are happening outside of the banking world and we end up getting tarnished with that brush.
DHUE: But consumer attorney Ira Reingold says the banks are far from blameless in the financial crisis.
IRA RHEINGOLD, EXEC. DIR., NATIONAL ASSN. OF CONSUMER ADVOCATES: The banks sit here with a straight face as we American people have bailed them out with hundreds of millions of dollars and saying oh, but we're good guys. You can trust us, is beyond absurd. And really it's almost laughable except that in Washington, apparently, it's not laughable because there are people in Congress who actually listen to that nonsense.
DHUE: He supports a new regulator because the existing ones, including the Federal Reserve didn't protect consumers but instead protected the banks.
RHEINGOLD: We need to create a new entity whose sole responsibility is consumer protection, whose world eye view is to protect all the homeowners and all the consumers in our country as opposed to protecting the banks who they have become way too comfortable with. DHUE: If the financial product safety commission gets off the ground, advocates say the only way it will work is if it is truly independent. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
