The Senate Releases Its Financial Reform Plan

The Senate’s financial reform plan was released yesterday by Sen. Chris Dodd:

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 part sounds familiar: The proposal […] included significant concessions to Republicans. I’ll bet exactly 0 of them will vote for it anyway but we’ll have to beg Landrieu, Lincoln, Nelson and Lieberman to vote for it anyway.

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.

It sounds like there’s a lot of nuance here and I think it will depend on how the regulations are enforced. For example: if a company’s financial ties were too complex to be resolved through normal bankruptcy proceedings, that sounds like an out to me. Who decides this? But having authority to takeover and break up a company like Lehman or AIG would have been useful during this last financial crisis.

Elizabeth Warren has expressed tepid optimism about the plan:

Elizabeth Warren, the lead advocate for the proposed Consumer Financial Protection Agency, seems to like—or, at least, not dislike—the financial reform package (finally) released on Monday by Sen. Chris Dodd, the Democratic chairman of the Senate banking committee. In the summary of the legislation, Dodd notes that his bill would create the CFPA as an independent bureau within the Federal Reserve—which could pose problems—but that it will have the power to write and enforce rules governing the sale of various financial products, including credit cards and mortgages. Yet its enforcement powers would not extend to banks with less than $10 billion in assets. In a statement, Warren notes:

Since bringing our economy to the brink of collapse, Wall Street has spent more than a year and hundreds of millions of dollars in an all-out effort to block financial reform. Despite the banks’ ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We’re now heading toward a series of votes in which the choice will be clear: families or banks.

Reform is desperately needed. As we all suspected, the bank bailouts were done without punishing anyone and they are merrily doing what they did before – jacking up fees and giving the profits to themselves. I think the CFPA is perhaps the most important part of this reform package which is why it is the most controversial provision. We’ll see if Democrats have learned lessons from the health care reform fight – that big business is not necessarily the side of the fight to be on – because the pressure to kill reforms will be enormous.