U.S. Senator Chris Dodd’s Plan For Financial Reform As Ambitious As It Is Antagonistic

U.S. Sen. Christopher Dodd, D-CT, on Tuesday released an 1,136-page draft bill for sweeping financial regulatory reform that will create several new protection agencies, increase regulation of credit agencies and derivatives, and alter the role played by the U.S. Federal Reserve in the financial system.

And that’s just the beginning what will be a long and contentious battle to get the bill past the Senate, the House of Representatives and the Obama administration. Lobbyists, large banks, and the heads of government regulators, such as the Federal Deposit Insurance Corp. (FDIC) Chairwoman Sheila Bair, will have their say on the proposal as well.

Still, Dodd’s bill, which he worked closely with U.S. Rep. and Chairman of the House Financial Services Committee Barney Frank, D-MA, to draft, is an important first step in the push for financial regulatory reform, which in recent months had been overshadowed by the Obama administration’s push for healthcare reform.

Among the most controversial elements of Dodd’s bill are four new, independent regulatory agencies that would combine the powers of certain regulators, particularly the U.S. Federal Reserve.

• The Financial Institutions Regulatory Administration: Perhaps the most controversial fixture of Dodd’s proposal is this “super-cop” of a regulatory agency that would combine parts of the Fed, FDIC, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) to oversee all of the nation’s banks - large and small.

• Agency for Financial Stability: This agency would be headed by a nine-member board that includes financial regulators and an independent chairman appointed by the president. It would be responsible to identifying and addressing systemic risks throughout the financial system. It would aim to discourage firms from growing so large and complex that a breakdown in operations would pose a threat to the nation’s financial stability.

• Consumer Financial Protection Agency (CFPA): A favorite of the Obama administration, this new, independent agency would oversee loans made directly to American consumers, such as mortgages and credit cards.

• National Insurance Office: This office would be created within the U.S. Treasury Department to oversee the insurance industry. This would be the first attempt by the federal government to regulate an industry that has traditionally been monitored by state authorities.

The bill also aims to create a safe way to shut down companies that are “too big to fail” by imposing tough new capital and leverage requirements and requiring they write their own “funeral plans.”  There also would be changes made at the Securities and Exchange Commission (SEC).

The SEC would be self-funded through registration fees paid by companies. And a new office would be created to monitor credit ratings agencies. The SEC, along with the Commodities Futures Trading Commission (CFTC), would also gain the authority to regulate over-the-counter derivatives.

Meanwhile, hedge funds worth more than $100 million would be required to register with SEC as investment advisers and to disclose certain data. Companies that sell securitized products would be required to retain a part of the risk. And executive compensation would be subject to a nonbinding shareholders vote.

It’s unlikely that all of these reforms will find their way into the final legislation. A regulatory reform bill that is as large and ambitious as Dodd’s will draw fire from many different angles. But the Connecticut senator was determined to make the most of his opportunity to revolutionize finance regulation

“I could have tried to draft something that was already a compromise of ideas in a sense, but I think you make a huge mistake by doing that,” Dodd said. “You’re given very few moments in history to make this kind of a difference. We’re trying to do that and I think this is important,” he said.

Financial Reform in for a Fight

The scope and complexity of Dodd’s bill make it unlikely the proposal will pass the Senate by year’s end. But it will force opponents to pick their battles and it’s clear that Dodd adopted a number of his colleagues’ suggestions - either to garner early support or because he thought they were good ideas.

U.S. Sen. Charles Schumer, D-NY, had requested the bill give shareholders more say over executive pay. Hence, the “say-on-pay” portion of the bill that forces executives to be susceptible to shareholder vote.  Schumer also advocated financing the SEC with registration fees.

The bill also included ideas from U.S. Sens. Jack Reed, D-RI, and Mark Werner, D-VA. Werner had previously introduced a bill that would give the government greater resolution powers over firms deemed “too big to fail.”

Of course, that doesn’t mean Democratic support is a lock. Democratic representatives have said they stand behind Dodd, but even Werner said he had “some concerns” and that there are aspects of the bill he’s hoping to change.

There so far have been no signs of Republican support for the bill, and it will almost certainly take flak from the Federal Reserve and FDIC, which would be stripped of their supervisory powers.

The Fed faces the biggest disintegration of authority. It would lose its role as a supervisor of banks to the new Financial Institutions Regulatory Administration and its consumer protection duties to the Consumer Financial Protection Agency.  Meanwhile, the Agency for Financial Stability would be responsible for snuffing out systemic risks to the financial system, with the Fed holding just one of its nine seats.

That ultimately leaves the Fed with the responsibility of setting monetary policy and little else. The move reflects the opinion of Dodd and others that the central bank - which failed to recognize, much less prevent, the onset of the financial crisis - already has too much responsibility.

“We saw over the last number of years when they took on consumer protection responsibilities and the regulation of bank holdings companies, it was an abysmal failure,” Dodd said.

However, Fed Chairman Ben S. Bernanke, who Dodd said is “doing a terrific job,” has argued that the central bank’s regulatory duties are essential if it is to have the information, expertise and authority to promote stability and regulate monetary policy.

“It’s hard to imagine monetary policy being conducted effectively in an environment where financial stability is lacking from the Fed’s mandate,” J. Alfred Broaddus Jr., a former president of the Richmond Fed, told Bloomberg News.

It also runs counter to the proposals of the Obama administration, which suggested expanding the Fed’s power.

“Dodd is basically starting out by out-reforming the administration,” a senior congressional staff member told The Washington Post.

The Financial Institutions Regulatory Administration and the Agency for Financial Stability could be the two biggest sticking points for the Obama administration.

“The biggest thing that jumps out is the consolidation of the bank regulators from four down to one. There doesn’t seem to be that much support for it politically,” Douglas Elliott, a fellow with the Brookings Institution, told American Banker. “The administration has not proposed it. I don’t know that they have a big problem with it, but they had certainly concluded it was not worth the political pain that it would require. This wasn’t a fight that the administration wanted to pick.”

Indeed, Dodd’s proposal goes a step further than the House bill, which simply sought to combine the OCC and OTS. And some lawmakers and industry groups are already skeptical of creating such a large bureaucracy to oversee all of America’s banks.

While Dodd’s plan requires the new agency to have a division explicitly devoted to community banks, some worry that the needs of smaller banks will be overshadowed by the demands of larger institutions.

“We are adamantly opposed to a single regulator,” Camden Fine, president of the Independent Community Bankers of America, told American Banker. “The 15 or 20 largest banks will soon dominate that regulatory agency. … There will be no counter voice.”

There could also be strife over Dodd’s systemic risk agency. Treasury Secretary Timothy Geithner already has warned that a regulatory council will lack accountability. And again, the Fed will fight to keep its role as arbiter of systemic risks.

“The Fed should have a particularly important role in supervising institutions that create a systemic risk,” said Janet Yellen, president of the Reserve Bank of San Francisco.

And even the proposed CFPA, which has been advocated by the Obama administration, will be contested.

“We’re against creating a separate agency to protect consumers,” Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group that represents big financial institutions, told NPR. “We think you can protect consumers a more effective way by strengthening the existing regulators rather than creating a separate agency.”

Regardless of the fight Dodd is in for, however, analysts and lawmakers alike agree that it is an important first step on the long way to necessary reform.

“Chairman Dodd’s draft bill moves us one step closer toward comprehensive financial reform,” said Geithner. “We look forward to working with the chairman and his committee in the coming weeks on a set of strong reforms to strengthen consumer protection, crack down on excessive risk-taking, and stabilize the financial system while protecting the taxpayer.”

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