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Tuesday, March 16, 2010

Dodd's New Plan for Finance Rules Aims to Give More Muscle to Fed

The Wall Street Journal

WASHINGTON—The political battle over rewriting the rules of Wall Street will intensify Monday afternoon when Senate Banking Committee Chairman Christopher Dodd is expected to introduce legislation tougher on financial companies than was expected just a few weeks ago.

The shift follows a push from the Obama administration, which sees a political advantage in pushing legislation taking aim at Wall Street. Mr. Dodd's bill would allow the Fed to examine any bank-holding company with more than $50 billion in assets, and large financial companies that aren't banks could be lassoed into the Fed's supervisory orbit. This came after Treasury officials pushed Mr. Dodd to bring more companies under the Fed's purview.

Any financial company, from small payday lenders to huge megabanks, would have to abide by new rules written by an autonomous Fed division that would be given the job of protecting consumers. This division would also be able to sanction any bank with more than $10 billion of assets for violations of consumer rules. Other industries could face enforcement if regulators decide to expand the division's powers. This is a departure from a more-constrained setup Republicans thought they had secured in recent talks.

The bill would now give the government more power to crack down on risky practices or certain types of lending.

In other highlights, under the proposed legislation the government would have power to seize and dismantle failing financial companies; complex financial instruments such as derivatives would face more scrutiny; shareholders would have more say in the way publicly traded companies operate; and the government would have more tools to force banks to reduce their risk.

Mr. Dodd has courted Republican support for months and said Sunday in an interview he still hoped to pass a bill with broad support. But he also appeared emboldened, and called Republican efforts to delay a vote "totally unrealistic and wrong." He suggested Republicans who wanted to make changes to the bill would have to "back up their commitment with the votes."

He dismissed arguments from some in the banking sector that have said more regulations would constrain credit. He called this a "Chicken Little" argument, calling it alarmist and arguing that financial crises are what dry up credit.

With Mr. Dodd intent on moving quickly, the banking industry will have limited time to try to shape the bill. "The industry will be subject to these new rules for the next 50 years or so, so this is a major moment in the history of the financial-services industry," said Scott Talbott, a senior vice president at the Financial Services Roundtable, a trade group representing large financial companies.

The Dodd bill comes nearly 18 months after the height of the financial crisis in 2008. Whether it can quickly gain traction could help determine the fate of the Obama administration's yearlong effort to rein in banks.

"There's no question that Treasury is pushing left, and that's what I would expect at this point," said Sen. Bob Corker (R., Tenn.), who negotiated for weeks with Mr. Dodd on parts of the bill.

The biggest winner in Mr. Dodd's bill appears to be the central bank. It would police previously unregulated sectors of the economy and would have a new division to write consumer-protection policy. The biggest losers appear to be large financial companies, who would face a muscular, centralized regulatory architecture for perhaps the first time in U.S. history.

Bill's Highlights

Dodd's proposal touches on several areas. Key points:

    * Consumers: A consumer-protection division would be created within the Federal Reserve, with the ability to write new rules governing the way companies offer financial products such as mortgages and credit cards. It would have authority over any bank with more than $10 billion of assets, and certain nonbank lenders.

    * Banks: The Fed would oversee bank holding companies with more than $50 billion of assets. Regulators would have the discretion to force banks to reduce their risk or halt certain speculative trading practices.

    * Failing companies: The government would be able to seize and break up large failing financial companies. Big companies would have to pay into a $50 billion fund to finance the dissolution of a failing firm.

    * Systemic risk: A new council of regulators would be created to monitor broader risks to the economy. The council could strongly urge individual agencies to take specific actions to curb risk.

    * Corporate governance: The Securities and Exchange Commission would have authority to write rules giving proxy access to shareholders who own a certain amount of stock. Shareholders would have a nonbinding vote on compensation packages for top executives.

    * Hedge funds: Large funds would have to register with the government.


Democrats opted last week to forge ahead and introduce a bill without Republican support. Central parts of the bill—especially consumer protection and the role of the Fed—could precipitate a clash, making the bill's prospects cloudy. Democrats believe they can rally public support, with many people still angry at the banking industry in the wake of the financial crisis.

"It would be great to find a bipartisan solution, but if we can't, we have to be true to the policy of ending the malpractice on Wall Street," said Sen. Jeff Merkley (D., Ore.), a member of Mr. Dodd's committee.

Mr. Dodd hopes he can begin holding votes in his committee starting next week. The legislation could come to the Senate floor by late April.

The House of Representatives passed its version in December. Any differences would have to be reconciled with a potential Senate version.

Republicans have said they wanted new market rules. They have blamed the White House for forcing Democrats to push ahead before a bipartisan deal could be struck. The party has not spelled out a strategy for responding to Mr. Dodd's bill, and it's possible Republicans could try to filibuster it, with Democrats one shy of the 60 Senate votes they need to end debate. On Friday, the 10 Republicans on the Senate Banking Committee urged Democrats to slow the process down.

Mr. Dodd's bill is expected to more closely align with the White House's initial proposal, after diverging from it during weeks of negotiations with Republicans. Mr. Dodd, in an earlier proposal, had cut the Fed out of bank supervision. After aggressive lobbying by Treasury Secretary Timothy Geithner and Fed officials, Mr. Dodd agreed to expand the Fed's scope to allow it to monitor any large financial companies.