President-elect Barack Obama is turning to seasoned pros for the Herculean task of overhauling the way the U.S. regulates its financial system, an effort he says is one of his top priorities.
His goal: to prevent crises like the one that has shattered Americans' nest eggs, devastated Wall Street and left the country in a painful recession.
Obama signaled an activist regulatory approach Thursday as he revealed key players on his incoming economics team.
Mary Schapiro, chosen to run the Securities and Exchange Commission, and Gary Gensler, who will head the Commodity Futures Trading Commission, both have extensive inside-the-Beltway policymaking experience. And Schapiro in particular has built a reputation as a pragmatic regulator who sees the need for close oversight of financial markets.
"They will be no-nonsense regulators," predicted Terry Connelly, a former Wall Street securities lawyer, now dean of Golden Gate University's Ageno School of Business. "Obama is sending a message of serious reform here. There will be no excuses if these people don't get it right. This isn't their first rodeo."
Obama also picked Dan Tarullo, a Georgetown University law professor with expertise in international economic regulation and banking, to be a member of the Federal Reserve.
Schapiro and Gensler will help lead the charge, working with the Treasury Department, the Fed and Congress to revamp a confusing patchwork of regulations and agencies that date back to the Civil War.
Obama is one of many who say the system needs to be updated to suit the globally interconnected modern world of finance where fortunes can be quickly made — and lost.
That web of financial players means that problems stemming from poorly regulated financial products can spread quickly. This lesson has been driven home in the United States and other countries that are struggling to overcome the worst financial debacle since the 1930s. Schapiro and Gensler, whose selections are subject to Senate approval, would take over at a time when lax oversight has borne much of the blame for the current crisis.
In particular, the SEC has come under fire for failing to detect signs that major Wall Street firms were in trouble. It also has been criticized for ignoring allegations brought to SEC staff about Wall Street money manager Bernard Madoff's businesses. Madoff has been accused of engaging in massive fraud that has bilked people and others out of $50 billion.
Regulators "dropped the ball," Obama said Thursday, citing the Madoff spectacle.
The president-elect indicated there will be a tougher regulatory and enforcement approach after he takes office on Jan. 20.
"Instead of appointing people with disdain for regulation, I will ensure that our regulatory agencies are led by individuals who are ready and willing to enforce the law," he said.
"These individuals will help put in place new common-sense rules of the road that will protect investors, consumers and our entire economy from fraud and manipulation by an irresponsible few," Obama pledged. "These rules will reward the industriousness and entrepreneurial spirit that's always been the engine of prosperity and crack down on the culture of greed and scheming that's led us to this day of reckoning."
At the forefront of that effort will be Schapiro and Gensler.
Schapiro once chaired the CFTC, which oversees the trading of oil, gas and other commodities. She also served for six years as an SEC commissioner under Presidents Ronald Reagan, George H.W. Bush and Bill Clinton. She is now the chief of Wall Street's self regulator, the Financial Industry Regulatory Authority.
"Investor trust is the lifeblood of our financial markets," Schapiro said Thursday. "The only way to restore the trust that has been lost is through effective, thoughtful reform of our regulatory structure and the consistent and robust enforcement of our financial regulations, and this will be my top priority."
Gensler was a Treasury Department official in the Clinton administration. And he was a major architect, as senior adviser to Sen. Paul Sarbanes, D-Md., of the 2002 Sarbanes-Oxley law, the landmark anti-fraud legislation enacted in response to the corporate scandals of that year.
Gensler also has advised Obama on financial regulation. Earlier in his career, he worked on Wall Street, spending 18 years at Goldman Sachs.
"In these times of significant challenges, the work we do together to restore our economy and reform the financial system is of such importance," Gensler said.
The Bush administration, as part of its own regulatory overhaul plan, proposed merging the functions of the CFTC into the SEC. Decisions regarding the future powers — or existence — of individual agencies now will fall to the next Congress and Obama's administration.
The selection of Schapiro could ease some political and industry anxiety about a possible merger of the SEC and CFTC, especially because Schapiro has worked at both agencies.
"Everyone knows Mary," said John Coffee, a Columbia University law professor and securities law specialist. Because she once led the CFTC, "the possibility of her leading a merged agency wouldn't be as threatening to Chicago" — the hub of commodity exchanges in the United States — than if she were purely a securities regulator, Coffee said. "Mary is seen as a centrist who believes in enforcement."
Barbara Roper, director of investor protection at the Consumer Federation of America, said she hopes Schapiro will be a more forceful regulator who will do a better job of protecting ordinary investors.
She "has had a real open door as far as we've been concerned," Roper said.
Roper said she also thought the choice of Schapiro "does signal to me that they may be seriously interested in pursuing combining SEC and CFTC."
Democrats on Capitol Hill expressed hopes that the choice of Schapiro, in particular, meant a new tougher cop on the beat.
"Mary Schapiro is the kind of strong and experienced regulator that we very much need in these times," said Sen. Charles Schumer, D-N.Y., who predicted quick Senate approval.