By: Sewell Chan
March 15, 2010
WASHINGTON -- The 1,336-page bill to overhaul financial regulation that Senate Democrats put forward on Monday with the backing of the Obama administration calls for Washington to play a more active role in policing Wall Street.
The plan would create a nine-member council, led by the Treasury secretary, to watch for systemic risks, and direct the Federal Reserve to supervise the nation's largest and most interconnected financial institutions, not just banks.
But the bill, which would amount to the most sweeping change in financial rules since the Depression, would preserve much of the existing regulatory architecture, which has been criticized for being too fragmented. And it would rely on a new mechanism for seizing and liquidating a huge financial company on the verge of failure, one that would diminish, but not eliminate, the likelihood of future bailouts.
The proposal, which was put forward by Christopher J. Dodd, the chairman of the Senate Banking Committee, included significant concessions to Republicans, compared with an initial draft Mr. Dodd released in November. It also contained provisions urged by President Obama to restrict banks' ability to engage in certain forms of speculative trading.
"This proposal provides a strong foundation to build a safer financial system," Mr. Obama said, adding, "As the bill moves forward, I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill, and will fight against efforts to weaken it."
Senate Republicans were muted in their response, saying they would introduce amendments to press their case on areas of disagreement, including the powers of a new Consumer Financial Protection Bureau that would set up inside the Fed.
But whether the legislation could pass in an election year, with a rancorous debate on health care looming over the Capitol, remained uncertain. Assuming all Democrats and independents in the Senate voted for it, at least one Republican would have to back it as well to avoid a filibuster.
"The stakes are far too high, and the American people have suffered far too greatly, for us to fail in this effort," Mr. Dodd said. "This legislation will not stop the next crisis from coming. No legislation can, of course. But by creating a 21st-century regulatory structure for our 21st-century economy, we can equip coming generations with the tools to deal with that crisis and to avoid the kind of suffering we have seen in this country."
Richard C. Shelby of Alabama, the top Republican on the Banking Committee, warned against trying to rush the bill through committee next week, as Mr. Dodd has said he intends to do. "Given the magnitude, complexity and importance of this task, it is critical that we have sufficient time for a thorough review," he said.
Any Senate bill would have to be reconciled with the House's version. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said, "There are some differences between the House-passed bill and Senator Dodd's version, but they are more alike than they are different."
A nine-member Financial Stability Oversight Council would subject to Fed oversight any nonbank financial companies that "pose risks to the financial stability of the United States in the event of their material financial distress or failure."
The council would also direct regulators to raise capital requirements. It would rely on the work of a new Office of Financial Research, within the Treasury, to serve as an early warning system for systemic risk.
Just as the central bank's creation in 1913 was partly a response to the Panic of 1907, the bill specifies that the Fed "shall identify, measure, monitor and mitigate risks to the financial stability of the United States."
The Fed would have two vice chairmen, one of them dedicated to supervision. The president of the Federal Reserve Bank of New York, who is now chosen by the bank's board and serves as the central bank's eyes and ears on Wall Street, would be appointed by the president of the United States for a five-year term. Banks regulated by the Fed could no longer have their executives sit on the boards of the Fed's 12 district banks or help select the district banks' presidents.
The Fed would continue to supervise bank holding companies with assets of at least $50 billion; there are about 35, including Bank of America, JPMorgan Chase and Citigroup.
Smaller bank holding companies would be supervised by the Office of the Comptroller of the Currency, which oversees national banks. The Fed's state-chartered member banks would be supervised by the Federal Deposit Insurance Corporation.
Mr. Dodd had initially proposed stripping the Fed of all bank supervision duties. Though he has backed away from that stance, Richard Spillenkothen, former director of banking supervision and regulation at the Fed, said the removal of more than 5,800 smaller and midsize banks from the Fed's purview would be a mistake.
"A central bank benefits from knowing what sort of credit issues and pressures are building up in banks of all sizes," he said.
The new consumer bureau would write rules banning abusive and unfair terms for mortgages and other financial products. Its director, appointed by the president for a five-year term, would set its budget, and the Fed would pay for it.
In a concession to Republicans, a consumer rule could be set aside if the council decided, by a two-thirds vote, that it put the banking system's safety and stability at risk.
The bill would also create a $50 billion fund, paid for by the largest financial companies, for the orderly liquidation of a company that is collapsing and whose failure would have "serious adverse effects on financial stability in the United States."
The provision for orderly liquidation would be invoked only as a last resort, if a company's financial ties were too complex to be resolved through normal bankruptcy proceedings.
Such a liquidation would require approval of the Treasury secretary and a two-thirds vote of the boards of both the Fed and the F.D.I.C.