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Dodd Announces FinReg Bill

Noting that two years ago today, Bear Stearns collapsed, Chris Dodd released his financial regulatory reform bill at a press conference where he said confidently that the bill will pass this year.

Saying that there has been “no financial reform on the scale I’ve been proposing since the 1930s” and that the current laws are hopelessly inadequate, Dodd released a draft which includes proposals from both sides of the aisle, including Sens. Richard Shelby (R-AL) and Bob Corker (R-TN). He does not currently have a bipartisan co-sponsor for the legislation, but he said “we do need to act, and I will act.” Of the 11 titles in the act, Dodd said that 9 of them reflected a bipartisan consensus. The two where there are differences, he said, are in the consumer protection and corporate governance areas. “We’ll begin the markup next week and move forward,” Dodd said.

Saying that “legislating in anger” is not as advisable as getting the bill right, Dodd laid out three major goals for the legislation: to plug the gaps in regulation, to “look in the windshield” rather than the rear-view mirror and create an early-warning system, and to protect American consumers from predatory financial products.

Specifically, Dodd highlighted four major reforms:

1) End Too Big To Fail bailouts. “Taxpayers should not write a check because of an implicit guarantee,” Dodd said. The bill would discourage banks getting to this size through new capital requirements, he said. Banks which struggle would be shut down through bankruptcy or an orderly resolution. Senators Mark Warner and Bob Corker shaped this part of the bill.

2) Consumer Protection Agency. “A strong and INDEPENDENT consumer protection watchdog,” Dodd termed it, stressing the independent part of it. The CFPA would be housed in the Fed, but Dodd dismissed any concern with that, saying that the agency would have an independent director (nominated by the President and confirmed by the Senate) and an independent budget, with autonomy to craft and enforce rules. The Fed would have “not one iota of authority over the budget,” Dodd said, adding that he housed the CFPA at the Fed because of the consideration of votes. The agency would not have specific rules over what nonbank entities it can regulate, because Dodd would rather have the regulators determine that process. But, he said, “we’re not regulating the butcher” with this agency. Where there are so-called “safety and soundness” conflicts between the rules and the needs of banks, there’s “an ability in these regulations to resolve those conflicts,” by a 2/3 vote of the systemic risk council.

3) Systemic Risk Council. Dodd termed this as an “early warning system” which would look out for the next crisis and make recommendations for how to proceed. The Treasury Secretary would head up the council.

4) Transparency and Accountability. This concerns what Dodd calls “exotic instruments” like hedge funds and derivatives. The legislation basically includes similar language in this area as Dodd’s original discussion draft. Senators Jack Reed and Judd Gregg are working on this section, and if they reach consensus, their deal would replace this part of the bill.

Dodd mentioned some other pieces of the legislation, including the “say on pay” effort to “rein in insane compensation packages” at big firms; a new program at the SEC to encourage whistleblowers; the crackdown on conflicts of interest at the Federal Reserve (the head of the NY Fed would be chosen by the President and not member banks, for example); and increased oversight of the credit ratings agencies.

There was a hint in Dodd’s speech of the effort to force Republicans to defend Wall Street banks. He stressed the urgency for new rules to cut off potential crises, and basically challenged Republicans to stand in the way. The labor movement is gearing up for a fight on that front as well, though their aims are a bit broader, seeking the “financial responsibility fee” outlined by the President a couple months ago.

Not all consumer advocates are happy with the Dodd draft, so he’ll have a battle from the left on this bill, in addition to the recalcitrance from the right.

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David Dayen

David Dayen