Girding for the Wall Street Vs. Main Street Fight

(March 15) -- Shielding Americans from shady credit card fees, protecting taxpayers from financial bailouts, saving banks from becoming "too big to fail," policing hedge funds, and safeguarding the country from future economic crises.

Those are the main goals of a Senate bill more than half a year in the making and potentially the biggest U.S. overhaul of financial regulation since the Great Depression. But the chances of all or some of it becoming law hang on election-year politics as much as any need to confront the widely recognized gaps in oversight that contributed to the financial crisis and recent recession.

Senate Banking Committee Chairman Christopher Dodd on Monday introduced the Restoring American Financial Stability Act alone after months of unsuccessfully trying to get Republicans to join him, and three months after his counterparts in the House achieved passage of their own financial-regulation overhaul. He has the backing of President Barack Obama. And the issue has been resonant among voters still dealing with high unemployment and a disconnect between Wall Street and Main Street over high executive pay and other issues.

"Americans are frustrated and angry, as we all know. They've lost faith in our markets, and they wonder if anyone is looking out for them," said Dodd, D-Conn. Still, "the point of this reform bill is not to punish the financial services industry. ... Legislating anger isn't the way to solve these problems."

But harnessing voters' anger may be Dodd's best bet of getting a complicated, 1,336-page bill through a bitterly divided Senate, especially at a time when Republicans have suggested Democrats' push for passage of a health care bill could jeopardize most other business.

Obama took a moment away from his health care campaign to say he "will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it."

"We cannot wait any longer for real financial reform that brings accountability to the financial system and makes sure that the American taxpayer is never again asked to bail out the irresponsibility of our largest banks and financial institutions," added Obama, who has painted Wall Street chieftains with multimillion-dollar salaries as among his biggest political enemies since late last year.

Dodd praised Republican contributions to the bill through months of negotiations aimed at winning their support and voiced hope he will enlist some Republican backers as the bill moves through his committee and the Senate. But Republicans are almost universally opposed to the creation of a consumer protection agency, an idea that has become one of Democrats' central ambitions.

On Republicans' side in a potential fight is the deep-pocketed financial-services industry, which has a strong lobbying force on Capitol Hill and has been weighting its political donations heavily toward Republicans since the second half of last year.

"We are very disappointed that the bipartisan process has broken down, at least for now, and we do not believe that workable regulatory reform can be enacted without a bipartisan approach," said Edward Yingling, president of the American Bankers Association.

The ABA said it opposes the Dodd bill's approach to consumer protection, among other measures, as well as a federal relinquishing of some investing regulation to the states.

That change would raise the asset threshold for federal regulation of investment advisers to $100 million from $25 million, which the banking committee estimates would vastly expand state supervision of investment advisers and free up the Securities and Exchange Commission to monitor hedge funds managing $100 million or more. The hedge funds would now be required by the bill to register with the SEC and disclose enough of their operations needed to protect investors.

The bill would also:

• Create a Consumer Financial Protection Bureau charged with making and enforcing rules at banks, large credit unions, mortgage lenders, payday lenders, debt collectors and the like accused of selling unfair, deceptive and abusive financial products. To assure independence, its leaders would be appointed by the president and confirmed by the Senate, but the agency would be housed in the Federal Reserve.
• Establish a Financial Stability Oversight Council focused on identifying, monitoring and addressing systemic threats to the economy and financial system such as the subprime mortgages whose risk had spread throughout the investment world or the interlocking financial relationships that made giant insurer AIG too big to fail.
• Limit the size and complexity of financial companies to prevent them from becoming potential liabilities for taxpayers should they go under. This section of the bill includes a version of the so-called Volker Rule (named after former Fed Chairman Paul Volker), which would restrain bank and bank holding companies' proprietary trading to keep them from bettering their own money against the funds of their investing clients.
• Make the largest financial firms pay into a $50 billion contingency fund to help liquidate any company otherwise "too big to fail," thus charging the industry, rather than taxpayers, with taking the hit if such a firm goes under.
• Streamline bank regulation, vastly increasing the Federal Reserve's authority as a watchdog over bank and thrift holding companies with more than $50 million in assets. It would also expand congressional and White House checks on the Fed, in part by making the head of the New York Federal Reserve Bank -- one of the biggest players in the national financial system -- a presidential appointee rather than one picked in part by banks in that region.
• Impose greater transparency on the multitrillion-dollar market for credit derivatives, including the infamous credit default swaps, and give the SEC and Commodity Futures Trading Commission greater authority over derivatives.
• Broaden company shareholders' say over executive compensation.
• Require companies that sell mortgage-backed securities to retain some of those securities and thus a part of the risk they are selling to investors.

The bill has significant differences from the House overhaul of financial regulation passed last fall and sponsored by Rep. Barney Frank, who has said he firmly opposes placing consumer protection under the Fed -- which for years spent much more energy looking out for banks than for consumers.

But on Monday Frank, D-Mass., said Dodd "put forward a thoughtful, comprehensive bill which will, once the Senate has acted on it, form a very solid basis" for House-Senate negotiations, and that their two bills "are more alike than they are different."

Dodd also told reporters the independence of a consumer watchdog is more important than where it resides in Washington, suggesting that could be an area of compromise.

But first the bill must pass the Senate, which will be all but impossible without support of at least one Republican senator.

While the bill drew praise from Sheila Bair, the Republican-appointed head of the Federal Deposit Insurance Corp., and Elizabeth Warren, chair of the Congressional Oversight Panel, which watches over the Troubled Asset Relief Program, or TARP, Dodd may have to enter new negotiations with Republicans before he can bring the bill to a vote.

But Dodd, who plans to retire after this year, made clear he has no intention of letting such talks drag on with just 60 to 70 legislative days left on the Senate schedule before Congress breaks for a recess in October ahead of midterm elections.

"We are still vulnerable to another crisis, and neither I nor anyone else can tell you with any degree of certainty that the American economy could survive another crisis of this magnitude," he said. "We don't have many days left to actually get a job done. So there is a sense of urgency."