Obama Marks Lehman Collapse With Renewed Focus on Market Rules

By Nicholas Johnston

Sept. 14 (Bloomberg) -- President Barack Obama, speaking a year after Lehman Brothers Holdings Inc.’s collapse, heads to Wall Street today to outline his plan for unwinding government involvement in the financial sector and to argue that new regime of rules to prevent a market crisis is needed more than ever.

Obama will use the backdrop of Federal Hall in New York City to try and revive efforts at revamping market regulations. The president will urge the financial community to support that goal and he will emphasize the need for global coordination on financial oversight, according to an administration official speaking on the condition of anonymity.

The administration’s focus on health-care legislation has overshadowed work being done to craft a new set of financial regulations that the president called for earlier this year. Obama’s top advisers say the time to act is now.

“This is the year, after what has happened, to overhaul the system of financial regulation,” White House economic adviser Lawrence Summers told reporters last week.

Lehman’s filing for bankruptcy on Monday, Sept. 15, 2008, helped trigger a global financial crisis that led to more than $1.6 trillion in losses and write downs by financial institutions and unprecedented government interventions in banking, insurance and auto industries. The government bailouts, in turn, have stirred public anger, rippling beyond the financial system.

White House press secretary Robert Gibbs said yesterday that some of the public resistance to Obama’s health-care initiative as well as other administration proposals is linked to the unpopularity of the bailouts.

Catastrophe

“People are upset because on Monday we celebrate the anniversary of the Lehman Brothers collapse that caused a financial catastrophe unlike anything we’ve ever seen,” Gibbs said on CNN’s “State of the Union” program. The rescue of financial institutions and automakers General Motors Co. and Chrysler Group LLC “cost a lot of money, but it’s something that we had to do.”

In response to the financial crisis, the Obama administration proposed on June 17 changes to U.S. financial regulations, including oversight of the systemic risk large financial institutions pose to the economy, new ways for the government to dismantle failed companies and a regulator to oversee financial products for consumers.

During his 30 minute-long speech tomorrow, Obama will recount steps taken by the administration in response to the financial crisis and discuss steps the government is taking to reduce its involvement in the financial sector, the administration official said.

Treasury Secretary Tim Geithner will be in attendance along with Christina Romer, the chairwoman of the administration’s Council of Economic Advisors, the official said, along with members of the financial community and consumer advocates.

Keeping Up Pressure

With the unemployment rate poised to hit at least 10 percent this year, Obama has vowed the administration would keep up pressure on Wall Street to free up more credit for businesses and consumers and on Congress to write new financial rules.

The issue will be at the forefront when Obama plays host to a meeting of leaders from the Group of 20 nations Sept. 24-25 in Pittsburgh.

G-20 finance ministers and central bankers agreed on a blueprint for changes to financial services regulations, including global standards on pay, Sept. 5 in London. Those include a global pay code that include forcing banks to “claw back” cash awards if earnings falter and more closely tying compensation to long-term performance.

Detailed proposals scheduled to be presented in Pittsburgh, will suggest how banks can be forced to “prevent excessive short-term risk taking.”

This Year

Summers, the director of the National Economic Council, said that even with the focus on health care, new financial regulations can be enacted this year. Congressional committees have begun hearings on financial regulations and preparing draft legislation and a bill may reach the House floor by next month.

In making the case for broad changes to financial regulations, Summers said the crisis precipitated by Lehman’s collapse was just one in a long line of calamities including the 1987 stock market crash, financial downturns in Mexico and Asia during the 1990’s and the Internet company stock-market bubble.

Past Crises

“It is important to recognize that while the events of the last year stand apart in their magnitude and their severity, they do not represent the first time that events emanating from the financial sector led to the disruption of the lives of very large numbers of people,” Summers said. “Financial crises have been too large a feature on our economic landscape.”

Geithner said in an interview with the Financial Times today that the government didn’t have enough legal authority to support the banking system at the height of the crisis. He called that a “tragic failure” that must be remedied through new rules.

“Things are not yet in place,” Geithner said, according to the Financial Times. “We do not have a new international capital accord and stronger resolution authority in place yet.”

Obama’s speech “will focus on the need to take the next series of steps on financial regulatory reform,” Gibbs said last week. The president wants to put in place “sufficient safeguards to ensure that doesn’t happen again and cause the type of havoc that we’ve seen on our economy.”

Obama isn’t expected to offer new proposals, he said.

To contact the reporter on this story: Nicholas Johnston in Washington at njohnston3@bloomberg.net