WASHINGTON — With the banking system in turmoil early this year, and most major players calling for massive change, 2009 was considered the perfect year to finally pass regulatory reform.

Instead, many observers are wondering if the Obama administration blew its chances for a meaningful overhaul.

Though the House passed a bill on Dec. 11 that was based on the Treasury Department's blueprint for reform, the final legislation is expected to be substantially different than what the administration initially proposed. Far from giving the Federal Reserve Board more power, the central bank is liable to end up with much less authority. A new consumer financial protection agency, meanwhile, is likely to have only limited enforcement powers over banks — or none at all.

Critics gave several possible reasons the reform debate went awry, including that the administration attempted to tackle too much at the same time, started too late and did not do a good job of using public outrage against banks to its advantage.

"They have not done a good job of selling it," said Kip Weissman, a partner at Luse Gorman, "There is no question about that. They were not leading. They were responding. … The way the bills were packaged was fairly unsophisticated, and I think the public is more sophisticated than they give them credit for."

From the beginning, it was clear that the administration had mixed feelings about pursuing a single reform bill. President Obama initially said he favored passing a separate bill that would give the government the power to seize and dismantle large firms whose collapse could damage the economy.

By June, however, the administration had incorporated that idea into an 85-page white paper that also included calls to create a Consumer Financial Protection Agency, give the Fed power over systemically important firms, better regulate derivatives and merge the Office of Thrift Supervision with the Office of the Comptroller of the Currency.

But many said that by then the administration had waited too long to unveil its plan.

"The target of getting a proposal by the end of the year shows an extraordinary naivete about timing," said Richard Carnell, associate professor of law at Fordham University of Law and a former Treasury assistant secretary in the Clinton administration.

Lawrence White, a professor at Stern School New York University, agreed. "It's not like the pieces of regulatory reform were a mystery, so getting stuff up earlier — who knows why things happen on the Hill but [Treasury Secretary Tim Geithner] didn't help himself by waiting until June."

Others said the plan was simply too broad.

"I think they tried to do too much," said Ed Yingling, president of the American Bankers Association, which opposed the House bill. "I'm not saying it shouldn't have been a huge bill, but I think they added complexity where they shouldn't. … They tried for too much. They made the bill too complicated and now they are seeing pushback."

Doug Landy, a partner in Allen & Overy LLP and formerly a lawyer at the New York Fed, said, "I do think from Treasury's point of view they tied everything up in a nice package."

"But once you put out a broad bill, it's very easy to attack a piece of it," he said.

Further complicating the process was the main beneficiary of many of the administration's proposed reforms: the Fed. Though Geithner billed the reform package as merely codifying the central bank's existing authorities, that was not how it was perceived. Under the administration's proposal, the Fed had unchecked authority to identify and regulate systemically important firms, including nonbanks. The House eventually scaled that back somewhat, making the Fed share some power with an interagency council.

The problem was that a proposed promotion for the Fed came as the central bank was increasingly the subject of public skepticism and distrust. Lawmakers, particularly in the Senate, did not want to go along with it.

Senate Banking Committee Chairman Chris Dodd has proposed to go the opposite direction from the administration, stripping the central bank of its existing bank regulatory powers and designating an interagency council as the systemic-risk regulator.

"The Fed is unpopular now, and that is unfortunate, because I think the Fed has done a superb job in this crisis," said Phillip Swagel, a visiting professor at Georgetown University and a former Treasury official in the Bush administration. "I'm sure they are aware of the challenges, and I'm not sure why they haven't been more proactive explaining how good a job the Fed has done."

Some observers said the administration should have done a better job of sounding out lawmakers before introducing its plan.

"They were naive to an extent," said Mark Calabria, director of financial regulations studies at the Cato Institute and a former Republican Senate aide. "Part of it was groupthink. You get the impression there wasn't a lot of due diligence where members were going to be. … Clearly when [Geithner] went up there the first time, he had not recognized the extent Congress and the public are hostile to the Fed right now."

Ironically, the creation of a consumer protection agency was expected to be much easier. With the public seething at banks, the creation of a separate regulator to help consumers appeared to have momentum.

Though big banks found the idea distasteful, privately many lobbyists predicted it would be part of the final reform package. But the administration failed to rally much support for the idea, and industry arguments against it gained traction.

After community banks came out in force against the idea, House Financial Services Committee Chairman Barney Frank was forced to craft an exemption for banks with assets of $10 billion or less. Those banks would not be subject to regular enforcement by the new agency.

During debate on the House floor this month, Rep. Walter Minnick, D-Idaho, nearly succeeded in eliminating the CFPA plan from the bill in favor of a proposed interagency council that would write new consumer protection rules. The amendment failed 223 to 208, but 33 Democrats voted against the CFPA.

In the Senate, where moderate Democrats have voiced objections to the new agency, the prospects for the new agency are even more uncertain. "I believe the first casualty of the Treasury proposal is going to be the Consumer Financial Protection Agency," said Kevin Jacques, Boynton D. Murch Chair in Finance at Baldwin-Wallace College and a former Treasury official. "I don't know Treasury has sold to the American public that issue hard enough."

Obama has attempted to shift attention back to the CFPA, and criticized banks for opposing it.

"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," Obama said in a September speech to Wall Street. "So I want to urge you to demonstrate that you take this obligation to heart. … And, of course, to embrace serious financial reform, not fight it."

While the administration appeared surprised at the resilience of the banking industry lobby, many said the administration should have seen it coming.

"I think in some ways that was a little naive of Treasury to not expect," Landy said.

In an interview, Treasury Deputy Secretary Neal Wolin defended the administration's handling of reform. He said it was natural that Congress would make changes to the plan and that the final product would follow the basic outline of what the administration proposed. "Of course there were going to be changes," Wolin said. "It never was the case that Congress was going to take a thousand-page bill with a very complicated set of subjects and rubber-stamp the administration's proposal. We never expected that would happen. All together, it is quite consistent with what we put forward."

Some observers also said the Treasury should be commended for getting this far. The House passed a bill 223 to 202 this month, six months after the administration first unveiled a plan, and the Senate is poised to resume debating a bill in 2010.

But it did not meet the timetable the administration gave itself. Repeatedly President Obama and Geithner pledged to have a bill signed by the end of the year.

Many also said the Treasury was a victim of distraction, with the White House and Congress spending most of the year focused primarily on health-care reform. Though the administration appears in reach of a health-care bill, it may find less support for regulatory reform by the end of the process.

"They are going to use up so much political goodwill with health care, I don't know that they will have much left for regulatory reform," said Paul Miller, managing director at Friedman Billings Ramsey & Co. "I think they are going to lose momentum on financial reform, especially in the Senate."

"One of the difficulties we've really run into here is other issues have bumped financial reform off the front page," Jacques said. "It is not as important as it was six months ago. … It is a dying issue."

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