Obama urges Wall Street to embrace tighter regulation

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President Barack Obama sternly warned Wall Street against returning to the sort of reckless and unchecked behavior that threatened the nation with a second Great Depression during a speech at Federal Hall in New York, Monday, Sept. 14, 2009. (AP Photo/Henny Ray Abrams)

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President Barack Obama's call for Wall Street to embrace his vision to tighten regulations in the financial services industry generally is endorsed by Utahns laboring in the state's banks, brokerage houses and other businesses.

But the divergence of opinion, from those who said he didn't go far enough to those who fear his efforts may stifle growth, illustrates the intense battle that lies ahead.

In a speech that at times seemed like a lecture at Federal Hall in lower Manhattan on Monday, Obama said some in the industry already are forgetting the lessons of the recent crisis, which was triggered when investment bank Lehman Brothers collapsed into bankruptcy a year ago to the day.

Lehman Brothers' failure helped

"We do need to rethink the whole regulatory structure of the financial services industry but what has been wrong is that regulators have become the puppets -- the towel boys of Wall Street," said Patrick Byrne, CEO of Overstock.com, an online discount retailer.

And until Obama is willing to make the hard decisions to separate the regulators from those they regulate, any initiative will be akin to "rearranging the deck chairs on the Titanic," Byrne said.

The public remains edgy about Wall Street and the economy.

A year after the meltdown, which saw billions of tax dollars flow to some of the biggest financial services companies, seven of 10 Americans lack confidence the government has taken steps to prevent another meltdown, according to a new Associated Press-GfK poll.

But in a stern bid to boost his regulatory proposals first outlined in June, Obama cautioned his Wall Street audience not to try to block them. "It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system and a more broadly shared prosperity," he said.

Yet Frank Pignanelli, executive director of the National Association of Industrial Bankers in Salt Lake City, said the president may well find himself walking a tightrope between increasing regulation and the need to keep credit flowing.

"We certainly support the president's effort to try and restore confidence in the financial services industry," he said. "But you also don't want to regulate to the point where you take away the incentives for capital to flow into the economy."

Obama is seeking tougher capital requirements for banks, arguing that the buying of exotic financial products without keeping enough cash in reserve was a key cause of the crisis. His plan also would give the Federal Reserve new powers and discourage companies from getting too big.

The president also has proposed a new consumer protection agency to make rules for financial products, so people know what they are buying. And when it comes to that proposal, Gary Teran of First Western Advisors in Salt Lake City said Obama isn't going far enough.

"Many of his ideas for a new regulator scheme appear to me to be redundant and unnecessary," Teran said. "Still, I would like to see more regulator effort put into place focusing on any new products that might be offered."

He said Wall Street often only thinks about the short-term profits that can be achieved with new products and not their long-term impacts on the economy.

Obama said he doesn't intend to go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. "Those on Wall Street cannot resume taking risks without regard for consequences and expect that, next time, American taxpayers will be there to break their fall."

But there is plenty of blame to go around, said Sterling Jenson, senior managing director of Wells Fargo Capital Management in Salt Lake City. "Wall Street played a role, but so did the government and individuals. We all assumed too much risk."

The president's speech reflected public sentiment that taxpayers were immeasurably harmed from last year's financial collapse -- and that, barring change, it could happen again. As investment giants return to profit, millions of Americans are still coping with unemployment, home foreclosures and dwindling retirement portfolios.

Howard Headlee of the Utah Bankers Association said he was pleased to hear the president acknowledge that community banks in Utah and other states didn't contribute to the meltdown.

"Our regulatory system worked," Headlee said. "We (community banks) have more than 1,700 pages of consumer protection regulations that we have to abide by. Maybe it would be smarter and less complicated to apply our regulatory structure to those non-bank lenders that originated 95 percent of the subprime mortgages."

The president's plan has yet to gain serious traction on Capitol Hill. Democratic leaders have been consumed by the health care debate and staff members are still wrestling with the complexities. The plan is being fought by a determined financial services lobby with a major assist from big business groups and infighting among regulators.

The Associated Press and Los Angeles Times contributed to this story