Congress – including Democrats – in no hurry to approve Obama's regulatory reform

Congress is not inclined to rubber-stamp or even move quickly on the Obama administration’s blueprint for a financial regulatory makeover.

That’s the takeaway from Treasury Secretary Timothy Geithner’s first appearance before a congressional panel to defend the new plan.

Many other big issues are clamoring for lawmakers' attention: a historic reform of healthcare, a vast overhaul of US energy policy, two wars, and a Supreme Court confirmation fight. But oversight of the financial services industry has legislative hurdles all its own.

Many lawmakers are still smarting from Congress’s quick approval of the Bush administration’s Troubled Asset Relief Program (TARP), seen as a bailout for the “too-big-to-fail” bad actors that helped cause the problem. This time, they say, Congress has got to get it right.

In any new reform, regulators must be “focused and empowered, aggressive watchdogs rather than passive enablers of reckless practices,” said Sen. Christopher Dodd (D) of Connecticut, as he opened a hearing of the Senate Banking, Housing and Urban Affairs Committee on Thursday.

Sen. Richard Shelby (R) of Alabama, the ranking Republican on the panel, called for an evaluation not only of the president’s proposed reforms, “but more importantly, a close examination of the facts upon which he based his recommendation.”

Few facts are in as much dispute on Capitol Hill as the role of the Federal Reserve in enabling a financial crisis that ate up $6 trillion in US household assets. The Obama administration blueprint gives the Federal Reserve new authority “to supervise all firms that could pose a threat to financial stability, even those that do not own banks.”

That’s because the Fed “has the most experience to regulate systemically significant institutions.”

A new Financial Services Oversight Council of financial regulators is to identify emerging systemic risks, but the “first responder” in any financial emergency is still to be the Fed.

“You cannot convene a committee to put out a fire. The Federal Reserve is the best positioned to play that role,” Secretary Geithner told the panel.

At the same time, the Obama plan removes from the Fed and other bank regulators oversight responsibility for consumers. That role will be assigned to a new Consumer Financial Protection Agency. In a bid for more accountability, the plan would also require the Fed to get written approval from the Treasury Secretary before using its emergency lending authority.

But it’s the Fed’s enhanced powers that have drawn the most early fire on Capitol Hill.

“Giving the Fed more responsibility at this point … is like a parent giving his son a bigger … faster car right after he crashed the family station wagon,” said Senator Dodd, citing testimony from former Fed examiner Mark Williams. He added that he had not yet made up his own mind on the issue.

Obama administration claims of special expertise for the Fed represent “a grossly inflated view of the Fed’s experience,” added GOP Senator Shelby.

“As a systemic risk regulator, the Fed would likely have to regulate insurance companies, hedge funds, asset managers, mutual funds, and a variety of other financial institutions that it has never supervised before,” he added.

House Republicans also took aim at an enhanced role for the Fed.

“One of the things that has disappointed me about this bill is frankly that they essentially leave all the old regulatory infrastructure in place and then they simply add on to it,” says Rep. Jeb Hensarling (R) of Texas, the ranking Republican on the House Financial Institutions and Consumer Credit subcommittee.

A hearing on the plan with the full House Financial Services Committee, also on Thursday, was postponed, due to late votes in the House. But the panel expects to begin its own markup of legislation in July, winding up the complex overhaul in early September.

The House panel will begin with the issues of executive compensation and consumer protections, while leaving issues of systemic risk, including the Fed’s role, for later.

Chairman Barney Frank (D) of Massachusetts played down criticism of an enhanced role for the Fed.

“It’s one thing to say you’re going to regulate systemic risk, it’s another to have the degree of sophistication you need to do it,” he said.