Remember the financial crisis? Senate unveils its fix

McClatchy NewspapersMarch 15, 2010 

WASHINGTON — Eighteen months after Wall Street's brush with apocalypse, the Senate on Monday began to rewrite the nation's financial regulatory rules with the introduction of a sweeping bill designed to fix the causes of the deep economic crisis.

"The stakes are far too high . . . for us to fail in this effort," Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, said when introducing the Financial Stability Act of 2010.

By Dodd's calculation, the Senate has no more than 70 working days before midterm elections this November to pass an overhaul and then narrow its differences with a bill that the House of Representatives passed in December.

"We don't have many days left to actually get the job done, so we have some urgency," Dodd said, adding that he tried but failed to strike a compromise with Republicans, who he said still had much input into the legislation.

Dodd's legislation — 1,336 pages in the online version — would create new consumer protections, grant first-ever authority to dissolve large firms that the government deems a threat to the financial system, and impose rules so that taxpayer money won't be used again to bail out big, troubled institutions.

Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, welcomed Dodd's version.

"There are some differences between the House-passed bill and Senator Dodd's version, but they are more alike than they are different. I believe that we will be able to work constructively together to meet the public need for a tough, comprehensive bill," Frank said.

President Barack Obama also praised Dodd's bill, although he suggested that it's only a beginning.

"This proposal provides a strong foundation to build a safer financial system," Obama said in a statement. "It creates a new consumer financial protection agency to set and enforce clear rules of the road and establishes stronger supervision for the largest financial firms under the Federal Reserve."

Dodd's bill would create a Consumer Financial Protection Agency, as in the House version, but his proposal would house it within the Federal Reserve rather than create a stand-alone agency. This agency would write rules to govern a host of consumer credit products, ranging from mortgages and payday loans to credit cards.

Significantly, this independent agency, whose leader would be selected by the president and confirmed by the Senate, would also get enforcement powers. Republicans, banks and the U.S. Chamber of Commerce oppose that.

The new agency's rules would set a floor for consumer protection, so states could adopt tougher measures.

"This would disrupt the uniform and efficient operation of the banking system, increase the cost of compliance, and potentially confuse consumers and businesses with a hodgepodge of rules and regulations," said Richard Hunt, the president of the Consumer Bankers Association, in a statement. Rather than streamlining banking regulation, consumers banking across state lines would be subject to different laws in different jurisdictions.

The idea for a consumer panel grew out of the writings of Elizabeth Warren, a Harvard University bankruptcy law professor who now heads a special Congressional Oversight Panel to oversee how taxpayers' bailout dollars are spent.

Warren and other consumer advocates objected to some parts of Dodd's approach, such as letting banks with assets of less than $10 billion escape regulation by the new panel, and giving some veto power to financial regulators over the consumer unit. However, Warren praised Dodd's bill overall.

"Despite the banks' ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We're now heading toward a series of votes in which the choice will be clear: families or banks," Warren said in a statement.

Gail Hillebrand, a director of Consumers Union, the publisher of Consumer Reports magazine, said tougher language is still needed.

"We need a government watchdog with real authority to protect consumers. Lawmakers should strengthen the Dodd proposal by making sure that the banking regulators who failed to prevent our current financial crisis can't stand in the way of needed consumer protection," she said.

The Senate bill differs from the House version in how it would guard against risks to the broader financial system. The House bill would grant broad new powers to the Federal Reserve to police the entire financial system for risks.

Dodd's bill calls instead for a nine-member Financial Stability Oversight Council, to be chaired by the Treasury Department with other members drawn from other financial regulators, to watch out for risks. It would make recommendations to the Fed for strict rules to prevent banks from growing so large that their failure would pose a risk to the financial system. The September 2008 collapse of Lehman Brothers and subsequent rescue of insurer American International Group heightened attention to this concept of financial firms being "too big to fail."

Dodd's bill would broaden the Fed's powers over large banks, with assets greater than $50 billion, and would allow it to regulate big non-bank institutions such as AIG.

Before the newly empowered Fed would be permitted to break apart a financial institution it deemed "too big to fail," two-thirds of the nine-member oversight panel would have to approve.

Given that regulators failed to communicate effectively among themselves before the crisis, there's skepticism about the umbrella approach now.

"Each of the agencies has their particular mindset that they bring to the table. It doesn't stick the authority in one place and say 'you're responsible for this,'" said Kevin Jacques, a 14-year veteran of the Treasury Department.

Like the House, the Senate bill would create a fund, paid for by banks, to cover the cost of dissolving large financial institutions. The House calls for a $150 billion fund; Dodd, for a $50 billion fund.

The Senate bill goes further than House legislation in attempts to rein in large, complex financial institutions. Dodd largely adopted a proposal from former Fed Chairman Paul Volcker, now an adviser to Obama, to prevent large institutions from trading in their own funds if they also trade on behalf of clients.

Under the Dodd bill, regulators would issue rules to prevent banks and bank holding companies from owning a hedge fund, private equity fund or from conducting proprietary trading.

While Dodd failed to introduce a bipartisan bill, it isn't plagued by the sort of divisive partisan strife facing health care legislation. Key Republicans pledged to keep working with Dodd.

ON THE WEB

Financial Stability Act of 2010

Summary of Act

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