Though Barack Obama pointed to the Gramm-Leach-Bliley Act of 1999 during his presidential campaign as a source of the financial crisis, his administration's proposal for regulatory reform would expand a key part of the law that gave the Federal Reserve Board "umbrella supervisory" powers.
The plan would remove restrictions that prevent the central bank from examining, requiring reports from or forcing higher capital at the subsidiaries of the largest firms.
While the Obama administration argues those provisions prevented the Fed from properly using umbrella supervision, others argue the central bank was never truly hampered and did not use what power it had.
"The Fed blew it," said Cornelius Hurley, a former Fed lawyer who is now the director of the Morin Center for Banking and Financial Law at the Boston University School of Law. "When it comes to being an umbrella regulator, I don't think the Fed ever exercised that role truly. I don't think the Fed ever took that role seriously. It could have been more vigilant as to what ultimate effects financial engineering was having on institutions outside its purview."
Ironically, the Fed fought with the Treasury during the 1990s to win umbrella supervisory powers, which allowed the central bank to poke around the subsidiaries of banks and financial holding companies. The Fed was supposed to rely mostly on information from an institution's primary regulator.
Observers said there was no evidence that the Fed was ever stymied in receiving such information or from using its powers as a holding company supervisor to circumvent restrictions.
"I don't remember the Fed saying it couldn't get this information," said Gil Schwartz, another former Fed lawyer who now works in private practice. "I don't have a lot of sympathy for people who say the Fed could have done more if they had the information."
Under Gramm-Leach-Bliley, Schwartz said the central bank could have forced a holding company to sell a subsidiary institution if there were safety and soundness concerns.
"If the Fed felt the bank was in jeopardy, the Fed could have told the entity to spin off the bank," he said.
Such a move may have constituted something of a nuclear option, since a holding company would be hobbled without its subsidiary but it still gave the central bank leverage over the holding company and its subsidiaries.
The criticism underscores widespread concern in Congress that the Fed has not used the powers already at its disposal, raising questions over why it should be given even more authority.
Many also find it strange that while Obama has criticized Gramm-Leach-Bliley, he is expanding on a key piece of the law.
"It certainly builds upon it in recognizing the central role of the Federal Reserve in regulating financial institutions," said Wayne Abernathy, the American Bankers Association's executive vice president for policy and regulatory affairs, who helped write the law when he was Sen. Phil Gramm's staff director. "That was a structure created under Gramm-Leach-Bliley."
Though the Obama plan would give the Fed vast amounts of new authority, forcing all holding companies under its supervision and removing any barriers to the central bank examining their subsidiaries, it is clear the Fed and Treasury do not want others to see it that way.
Treasury Secretary Tim Geithner told Congress this month that the Fed stood to gain only "modest" powers.
Appearing before a House panel on Thursday, Fed Chairman Ben Bernanke denied the central bank received much new power at all.
"It's not a major difference in terms of powers from what we currently have, which is being umbrella supervisor of all the financial holding companies," he said. "Rather, it would not be so much a change in powers, but a change in approach, whereby we would take a systemic system-wide approach in how we would regulate those firms, rather than looking at them bank by bank or firm by firm."
Bernanke requested in a speech last month, however, that the central bank be free from any restrictions on its umbrella supervisory powers.
But doing so may effectively unwind "functional regulation," the principle underlying Gramm-Leach-Bliley that allowed regulators like the Securities and Exchange Commission and the Office of the Comptroller of the Currency to focus on their particular areas of expertise.
"We're definitely getting away from the idea of functional regulation and getting toward an idea of consolidated regulation," said Brian Gardner, an analyst with KBW Inc. "There's a sense that functional regulation didn't work."
Such a framework essentially allows the Fed to second-guess the judgments made by primary regulators, a prospect that has raised concerns in the past.
"Part of putting Gramm-Leach-Bliley together was to reassure functional regulators that the Fed wouldn't be a bull in a china shop," Abernathy said.
Considering the broad range of issues dealt with in Gramm-Leach-Bliley, the White House chose to reopen a relatively narrow scope of the law. But for some, it is hard to imagine that broader aspects of the legislation will not come up for debate.
"There will certainly be political pressure to do so," said Kevin Jacques, the chairman of the finance department at Baldwin-Wallace College. "There are institutions out there that say Gramm-Leach-Bliley imposes a very large cost but really doesn't gain anything."
Ultimately, the policymakers who helped pass Gramm-Leach-Bliley continue to argue the effort was worthwhile. Former President Clinton told The New York Times Magazine last month that the law might have helped fuel firms to become "too big to fail" and to encourage poor management but he laid most of the blame on the SEC.
"If I had known that the SEC would have taken a rain check, would I have done it?" he asked. "Probably not."
Ken Bentsen, a former Democratic congressman from Texas who voted for the legislation, said he continues to support the law.
"I don't think it was the wrong vote at all," he said. "I'm not going to fall on my sword to defend Gramm-Leach-Bliley. Are there things that didn't work? Sure, but that happens with everything."
Jim Leach, the former Republican congressman from Iowa who helped push the legislation through the House, also said he has no regrets and praised the administration's plan. He warned that tinkering too much with the law was dangerous.
"Congress should be very careful in undercutting the proposal," he wrote in an e-mail last week.