At a press conference today peppered with repeated praise for his colleagues at the Senate Banking Committee, Chairman Christopher Dodd touted the introduction of the second draft of the financial reform package he and others on the committee have been working on for many months. Senator Dodd said the proposal is "comprehensive in its scope" because the problems it addresses are comprehensive, but that it is not an attempt "to punish the financial services industry."
The legislation can be viewed here [1336-page pdf]. An 11-page summary can be seen here. President Barack Obama commented here.
Dodd emphasized that the draft legislation includes bipartisan ideas. But it does not yet have bipartisan support.
One of the key sticking points for liberal Democrats, such as Senators Jeff Merkley, Chuck Schumer and Jack Reed, as well as Rep. Barney Frank, has been that compromises with Republicans announced in the past few weeks would put the much-heralded Consumer Financial Protection Agency under the Federal Reserve. Dodd doggedly noted today that the fact the agency will be housed in "rented space in the Fed does not mean it has one iota of authority" over the agency. It remains to be seen whether that declaration will prove persuasive to those who have previously viewed the legislation as defanging and downsizing the original proposal for a consumer agency. The White House has supported setting up an independent agency outside the Fed. The House has already passed legislation to that effect.
Dodd said in his prepared remarks that the agency will be "strong and independent." Its chief will be appointed by the President and confirmed by the Senate, and it will have an independent budget. Its job will be to craft and enforce rules regarding, among other things, checking account fees, credit-care interest rates and predatory lending.
Although the massive bill includes 11 titles, Dodd focused on three others besides the consumer protection agency in his remarks:
• An end to "too big to fail" bailouts, new capital requirements, safe liquidation of failed financial firms and "updating the Fed's authority to allow system-wide support but no longer prop up individual firms." In an interview in The Wall Street Journal on Sunday, Dodd said:
"Never, ever, ever again should any financial institution become so large, so interconnected, so complex that they have the implicit guarantee the American taxpayer will bail them out if they get in trouble. The result will be bankruptcy or a resolution that will be so painful you never want to think about it as an option."
• An early warning system run by a council that will "scan the economic radar" to identify practices that can lead to a crisis and do something about them.
• New rules regarding transparency and accountability. These would include eliminating "loopholes that allow risky and abusive practices to go on unnoticed and unregulated - including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders."
Dodd conceded that there is still no consensus on this last item, but noted that if agreement can be reached in on-going negotiations between Sen. Judd Gregg and Sen. Jack Reed, it will be included in the legislation.
Nothing is included that would restore elements of the New Deal-era Glass-Steagall Act that barred banks from operating simultaneously as commercial lenders, brokerages and insurance companies.
Mark-up of the bill is expected to begin next Monday with a Senate floor vote in late April. Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, whom Dodd today called his good friend, said:
"I have no doubt that Democrats can move this out of the committee. ... The question is can they move it off the floor. I say they won't be able to do that unless we meet critical mass, that is a lot of Republican help."
Ultimately, the worth of this legislation, assuming it passes, will depend on whether what has happened in the past can be avoided in the future. As Simon Johnson has pointed out, "every regulator sent to control big banks over the past 30 years has ended up completely captured – most recently the people who allowed Goldman to keep its bank license while retaining its full range of risky activities." If that can be changed, then financial reform might actually mean something.