Financial Reform Debate Approaches, Democrats Promise to Move Quickly
Apr 15, 2010
By Kristen Friend, staff U.S. Supreme Court writer – April 15, 2010
Democrats are vowing to bring financial reform to the forefront of the current legislative agenda, with President Obama pushing for a completed bill to be on his desk by the Memorial Day break. The President announced on Monday that he would actively push for tougher regulation as the Dodd bill makes its way to the Senate floor.  Financial reform legislation has already seen its share of ups and downs, having been declared dead and been brought back to life on more than one occasion. Then again, mere months ago health insurance reform was considered dead and unable to be revived by Washington insiders, following the election of Massachusetts Senator Scott Brown. Democrats managed to revive, pass and get that reform signed into law, and are now turning their newfound power to win victories with their Congressional majorities, in effort to pass financial and banking regulation. Many Beltway insiders are beginning to treat the passage of a financial reform package as inevitable. Even Republican Senator Judd Gregg has stated that the chance of a bill passing the Senate is “100%”.  While momentum may be turning toward the passage of some sort of financial reform, the final shape it may take is far from settled.
In a broad sense, financial regulation and reform aims to strengthen and simplify what is currently a patchwork of regulations overseen by a variety of agencies, and to fix a system that essentially allows banks and financial institutions to shop around for a regulator that they like.
Three different plans for the shape of financial regulation have emerged as the legislative process crept forward over the past year: the recommendations of President Obama, a bill passed by the House in 2009, and the revised Dodd bill which passed the Senate Banking Committee last month. Both the House bill and the Dodd bill passed without any Republican support, and neither bill is as tough as the original recommendations of the President. Critics, and some economists are accusing the Senate bill of having the fewest regulatory teeth of the three proposals. 
Each plan attempts to address a variety of systemic problems with the current banking and financial system responsible for contributing to the 2008 financial crisis that consumers and employers are still feeling the effects of today.
For example, remember a time over a year ago when everyone realized how much money banking executives were taking home, even as taxpayers and shareholders were left paying the price for their critical mistakes? Compensation structures allowed traders, bankers and brokers to reap the benefits of enormous profits while taxpayers and shareholders paid for the losses and took on all the risk. President Obama proposed limiting executive salaries and bonuses at the time, with banks unanimously crying foul, but to date nothing has been done to address the issue of compensation. General outrage at the policies has continued unabated.
Both the Dodd bill and the House bill take a stab at executive compensation, but the proposals are weak in terms of the real effect they may have on compensation policies. Each bill gives shareholders a non-binding vote on executive compensation, and the Dodd bill requires executives to return compensation that was based on inaccurate or non-compliant financial statements. Even the Federal Reserve has gone farther than that with a proposal to give itself the power to oversee the compensation policies of the nation’s largest banks.  
Another aspect of the regulation that is drawing a lot of heat for being riddled with loopholes is that which deals with derivatives and other “exotic” financial instruments – in particular over-the-counter derivatives. Most economists agree that derivates do serve a useful purpose, allowing people like farmers or industries like airlines to protect themselves from fluctuations in prices of, for example, corn or fuel. But over-the-counter derivatives are completely unregulated and out of the public view. No one really knows, and not many people can explain, what is actually happening in the derivatives market. The unregulated black hole of over-the-counter derivatives is often cited as one of the major culprits behind the failures and bailouts of 2008. 
President Obama has pushed to bring the derivatives market into the open and into a regulatory framework in order to prevent the type of speculation that was seen in the run up to the financial meltdown. Both the House bill and the Dodd bill propose bringing derivatives into exchanges that could be monitored, but most analysts agree that the bills will essentially allow business to go on as usual. According to Rob Johnson, Director of the Roosevelt Institute’s Global Finance Project, “Most of it is just codifying current behavior through loopholes.” 
Financial reform efforts will also attempt to create the legal authority for an agency to monitor and oversee an orderly dismantling of failing financial institutions and to address the problem of banks becoming too big to fail. Again, the solutions offered to these problems are drawing criticism. Republicans, perhaps realizing that opposition to financial reform is politically risky, have already indicated that this is the tack they are going to take to oppose the legislation. In a floor speech on Tuesday, Senate Minority Leader Mitch McConnell claimed that the Dodd bill “institutionalizes” taxpayer funded bailouts. 
This sentiment has been echoed in the House, with Republican Representative Spencer Bachus claiming, “Instead of real reform, the Democrats’ proposals would write into law the ad hoc government response to the economic crisis that put taxpayers on the hook for bailouts, rewarded Wall Street’s failures and froze capital needed to create jobs.” 
Both McConnell and Bachus argue that banks should simply be allowed to fail, with Bachus’ own plan calling for banks to solve their problems by filing for bankruptcy.
But, does this rhetoric match the actual language of the bills? Both bills do deal with the issue of a resolution authority – an organized process by which failing firms agree to shut down. In each of the bills, institutions with at least $10 billion in assets will be required to draw up a “living will” that will govern the shutting down or breaking up of the institution should the need arise. According to the House bill, the process would be funded by a before the fact fee on the institutions themselves. The Dodd bill would fund the resolution with an after the fact assessment.
Both bills also give regulators the legal authority to break up banks and institutions should they become “too big to fail.” The Dodd bill would form a nine member Financial Stability Oversight Council, led by the Treasury Secretary, charged with identifying institutions or products that pose a systemic risk. The Council could vote to give the Federal Reserve the authority to regulate non-banks that it sees as unnecessarily risky. Similarly, the House bill authorizes a systemic risk council whose decisions would be enforced by the Federal Reserve. 
According to supporters of the Dodd bill, crafting a plan for shutting down risky and unstable banks and financial institutions would prevent precisely the type of ad hoc, ‘bail out some and let others fail’ approach that led to the taxpayer-funded Wall Street bailouts McConnell claims the bill would reinforce. And, providing a funding mechanism that relies on fees levied on the financial institutions themselves is an effort to prevent taxpayers from again having to foot the bill. However, critics who fear the bill does not go far enough worry that, while an orderly process of shutting companies down may prevent another meltdown, the bill does little to address preventing banks and financial corporations from becoming too big to fail in the first place.
Although the argument that the Dodd bill codifies taxpayer-funded bailouts is disingenuous at best, it may be the most powerful argument Republicans have come up with so far to oppose the legislation. The standard talking point over the last year of political posturing and failed negotiations has been that banks actually need less regulation in order to prevent future crises. While this may be in line with the political ideology of deregulation, it does not go over well with a public that already feels repeatedly cheated by large banks and financial institutions.
Perhaps the most contentious aspect of the financial reform overhaul is that of the Consumer Financial Protection Agency. President Obama originally proposed an independent agency that would oversee financial products like credit cards and home mortgages and protect consumers from predatory practices. There is currently no regulatory body in charge of monitoring financial abuses and protecting consumers. Elizabeth Warren, chair of the Congressional Oversight Panel for the TARP bailout, has also argued passionately for such an agency. Warren argues, “The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants.”  Warren argues that consumers must be protected from banks that wish to profit from muddled, difficult to understand and inconsistent rules.
The House Bill does establish an independent, freestanding Consumer Financial Protection Agency. The agency would have an independent director appointed by the President and would have the power to both write rules and to enforce them. The Dodd bill does not go quite as far as an independent agency, instead creating a Consumer Financial Protection Bureau that is housed within and financed by the Federal Reserve. The Bureau would also have an “independent” director appointed by the President with rule making authority but some limits on the ability to enforce those rules. The Bureau would only be able to regulate banks with at least $10 billion in assets, as well as some of the largest financial companies and loan originators. 
Proponents of the Consumer Financial Protection Agency worry that it will become further watered down once the Dodd bill reaches the Senate floor for debate. John Taylor, president of the National Community Reinvestment Coalition, says of the bill in its current form, “It’s the consumer abuse and the lack of accountability and the lack of oversight of the lenders that got us into this mess. Unfortunately, it looks like this agency is independent in name only.” 
Republicans have already promised to offer amendments to the Dodd bill in a process reminiscent of the recent health insurance reform battle. While claiming that the security of the financial system is of paramount importance, the strategy here is to make as many changes to the bill as possible and ultimately vote “no” regardless. Democrats believe that they can draw some Republicans over to their side of the aisle because of the political popularity of financial reform, and are in some cases practically daring Republicans to vote “no.” But, recent history has revealed unwillingness on the part of the Republican caucus to support even the parts of legislation that they themselves have written, so certainly no aisle crossing is guaranteed.
Timothy Geitner, in an editorial in the Washington Post on Tuesday, claimed that regardless of opposition, now is the time to pass reform. Geitner wrote, “This is a defining moment for financial reform. We have to get it right. We cannot build a system that relies solely on the wisdom and judgment of future regulators.” 
Already, some Democrats, frustrated by the tendency of legislation to be rendered less effective as debate wears on, are pushing the argument that some of the reforms in the bill should be made stronger. According to Senator Byron Dorgan, “Given that [large financial firms] steered this country into the ditch, it’s going to be very hard to stand up on the floor and say don’t do financial reform or do it without teeth.” He continues, “There are a number of people in our caucus who feel like there are things that can be done to strengthen it.” 
President Obama met with the leadership of both parties at the White House on Wednesday to emphasize the need to move quickly on reform. Speaking about the need to modernize the system to better deal with current challenges, the President said, “An unfettered market where people are taking huge risks and expecting taxpayers to bail them out when things turn sour is simply not acceptable.”  Although the meeting may have been an effort to stem the partisan rancor over financial reform as the debate heats up, Senator McConnell left the meeting indicating that little in his opinion had changed, claiming, “If you look at it carefully it will lead to endless taxpayer bailouts of Wall Street banks.” 
The true test of this resolve is whether or not Democrats and President Obama will take their newfound sense of boldness (or at least of semi-boldness) and apply it to the art of legislating. The Dodd bill still has to face debate on the Senate floor and must be reconciled with the bill already passed by the House in December. We have seen a lot of sausage making in the last year, particularly with the in again, out again public option saga in the healthcare debate. Will the process dilute financial reform as well?
The Dodd bill and to a slightly lesser extent, the House bill, face opposition from both the right and the left. It is often said that the best sign of a good compromise is that neither side comes out of the process happy. And President Obama has made bi-partisan compromise a key element of his political philosophy. But the best test of legislation is not who is happy and who is not or whether bi-partisanship ruled the day. The true test of legislation is whether or not it works; in this case whether it protects consumers and financial markets. We have learned some hard lessons about financial markets in the past two years. When the Senate takes up financial reform this session, hopefully it will keep the right goals in mind.
1. http://www.reuters.com/article/idUSN131485120100413?type=marketsNews, Reuters
2. http://www.time.com/time/nation/article/0,8599,1977987,00.html, TIME, Financial Reform: Far from a Done Deal in Congress
4. http://www.financialreformwatch.com/tags/restoring-american-financial-s/, Financial Reform Watch, Dodd Gets the Ball Rolling on Financial Overhaul; Unveils Sweeping Legislation
5. http://www.usatoday.com/money/companies/regulation/2010-03-15-financial-reform-cover_N.htm, USA Today, Dodd’s 2nd shot at financial reform still leaves loopholes
6. http://www.nytimes.com/2009/05/14/business/14regs.html, The New York Times, Obama Proposes a First Overhaul of Finance Rules
7. http://online.wsj.com/article/SB10001424052702303695604575182111431255700.html?mod=googlenews_wsj, The Wall Street Journal, Senate Republicans Blast Regulatory-Overhaul Bill
8. http://wonkroom.thinkprogress.org/2010/04/12/bachus-aig/, Think Progress
9. http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201004131100dowjonesdjonline000245&title=feds-tarullo-urges-advisory-body-to-systemic-risk-council, Fed’s Tarullo Urges Advisory Body to Systemic Risk Council
11. http://www.nytimes.com/interactive/2010/03/16/business/financialreform-billcompare.html, The New York Times, Comparing the House and Senate Financial Reform Bills
12. http://www.reuters.com/article/idUSTRE63C05X20100413, Reuters
13. http://www.politico.com/news/stories/0410/35642.html, Politico, Democrats eager to take on Wall Street
14. http://www.abc.net.au/news/stories/2010/04/15/2873367.htm?section=justin, Obama comes out firing for economic reform
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