Financial Reform Watch : Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

 Congress was in recess last week for the President’s Day holiday, but Senate Banking Committee staff remained focused on financial reform. Despite the fact that committee Chairman Chris Dodd (D-CT) was spending his break on a congressional trip to Central America – by happenstance with his new negotiating partner Sen. Bob Corker (R-TN) – the committee staff announced that the Chairman would release his “new wide-ranging bill" this week. As of today, that deadline has already slipped to the first week of March, meaning that the committee will not markup the legislation until the second or third week of March at the earliest.

We are hearing reports that the new draft will establish a council of regulators, led by the Treasury Secretary, responsible for monitoring systemic risk across the entire financial system. There have also been reports the draft will include provisions for a new bankruptcy-like system to wind down institutions previously considered “too big to fail.” The FDIC is expected to have a key role in that process.

Separately last week, Sen. Richard Shelby (R-AL), the committee’s Ranking Republican, announced that he was working on a Republican alternative to the Chairman’s financial reform draft. Shelby has made no public statements about Corker’s decision to work with Dodd, but the fact that Shelby is producing his own bill speaks volumes.

There is a lot of prognosticating right now. Corker’s positions are far more in line with Shelby’s than Dodd’s. The question is will Corker be able to convince Dodd to pass a streamlined bill that deals with a few key issues and tables the thorny issue of the Consumer Financial Protection Agency? Many industry experts are saying that Dodd and Shelby would have already worked out that deal if it was possible, and the Republican caucus is likely of the same mind, which puts Corker in a tough position. The outlook for financial reform continues to be very uncertain.

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Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) continue to work towards bipartisan agreement on at least some key elements of a financial reform measure. While the process has been a rocky one, both Senators appear to be working hard to find common ground. They appear to have found agreement on at least two things:

1. There will NOT be a stand-alone Consumer Financial Protection Agency.  Rather, consumer protections functions will be folded into another agency or agencies.

2. The president's proposal to limit the size of financial institutions (the "Volcker rule") has complicated the process and may have come too late in the game.

Our contacts on the Hill are telling us to expect committee action on a financial reform package by the end of the month. Regardless of the final outcome of the Dodd-Shelby discussions, the Chairman appears committed to moving ahead.

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That is the recent refrain of Senate Banking Committee Republicans when asked about the financial services regulatory reform bill now pending in the Senate.

While Republicans have expressed continued willingness to work with committee Democrats to develop bipartisan legislation that would address the root causes of the recent financial crisis, they appear in no hurry to pass a bill—and certainly not what they consider a “bad bill”—just for the sake of having a bill.

As a whole, Senate Banking Committee Republicans think the Dodd bill and the House-passed reform bill go too far. Chairman Chris Dodd (D-CT) seems well aware of that fact and, as reported previously, has constituted numerous working groups to hammer out the various issues. Those groups are currently working together to resolve outstanding issues, with varying degrees of progress.

While the committee has been expected to mark-up its version of the financial reform bill in February, that schedule will depend upon the level of progress and bipartisanship the committee is able to achieve. One major stumbling block has been the establishment of a new Consumer Financial Protection Agency (CFPA)—a signature issue of the Obama Administration. Chairman Dodd has reportedly expressed a willingness to move away from the CFPA in a favor of giving more consumer protection authority to existing prudential regulators—a position also favored by committee Republicans.

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Sen. Banking Committee Chairman Chris Dodd's (D-CT) announcement that he will not seek re-election has roiled the already choppy waters surrounding the financial reform legislation. The Financial Reform Watch team has been intrigued by the comments attibuted to congressional and industry sources indicating that his retirement may increase the opportunity for a bipartisan bill. We are not so sure.

While we would all like to think that respect for a departing colleague and the desire of Senators to help him cement his legacy would result in more cooperation, there is little evidence to suggest today's Senate operates on that principle. We need only look back as far as the consideration of health care reform to support our view. Early in 2009, many thought the illness of Sen. Ted Kennedy would spur Senators to help him achieve his goal of more than 30 years to achieve health care reform. After his death, there was even more talk of how Senators might be moved to seek accommodation in his memory. Clearly, those sentiments—if they ever existed—were overwhelmed by the deep partisan divide in the Senate.

Today, those who indicate that bipartisanship might emerge in the wake of Dodd's announcement seem to believe he will be more accommodating of GOP concerns over certain issues—particularly the creation of the Consumer Financial Protection Agency. Our contacts on the Hill suggest that creation of that agency is as close to non-negotiable for the Administration and Sen. Dodd, not to mention House leaders, as any issue in the package. If the price of GOP support for the bill is dropping that, we are doubtful we will see much bipartisanship.

So our assessment is that is is too early to say whether Dodd's retirement improves or diminishes chances for a bill to be enacted. Your FRW team will be monitoring the situation closely and will keep you apprised of developments.

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This afternoon the House of Representatives took a significant step towards the enactment of comprehensive financial reform legislation, passing the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) by a vote of 223 to 202. Democrats would have preferred a larger margin of victory, but they can take some satisfaction from having now passed three of the Obama Administration's major priorities—climate change, health care, and financial reform.

Throughout the week, the Democratic leadership was forced to fend off several attempts by moderate Democrats to narrow the bill’s provisions, especially those relating to the Consumer Financial Protection Agency (CFPA). On Wednesday, word quickly spread around the Capitol that a federal preemption amendment backed by Rep. Melissa Bean and her allies in the New Democrat Coalition faced strong opposition from the White House and Treasury, who were seeking to bar it from consideration on the House floor. The Bean amendment would have broadened the CFPA’s ability to preempt state consumer protection laws. However, following direct negotiations between the New Dems and top Treasury officials, a modified version of Bean’s preemption amendment was ultimately wrapped into a manager’s amendment that passed on Thursday.

Another significant amendment, opposed by House leadership and the White House, was offered by Rep. Walt Minnick (D-ID). Minnick's amendment would have replaced the Consumer Financial Protection Agency (CFPA) with a Consumer Financial Protection Council (CFPC), comprised of 12 members, including, among others, the Secretary of Treasury, the Chairman of the Federal Reserve and the chairman of the CFTC and SEC. Although rejected by a vote of 208-223, Minnick was able to pick off 33 Democrats, potentially providing momentum for a CFPA alternative in the Senate where the Banking committee is still working on a bipartisan compromise.

The defeat of the "cramdown" amendment offered by Rep. John Conyers (D-MI) was a victory for the banking industry. Conyers' amendment would have enabled bankruptcy courts to modify mortgage repayment periods, reduce interest rates and fees, and lower the mortgage principal balance to the level of a home’s fair market value. Although the House passed similar language as part of the Helping Families Save Their Homes Act of 2009 (H.R. 1106) in March, the amendment was rejected today by a vote of 188-241.

Now that Financial Services Committee Chairman Barney Frank (D-MA) got his comprehensive reform package passed before the holidays, the pressure is on Senate Banking Committee Chairman Chris Dodd (D-CT) to produce results on his side of the Capitol.

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Treasury Secretary Timothy Geithner notified Congress today that the $700 billion Troubled Asset Relief Program (TARP) would be extended until October 3, 2010 – a move that, although expected, adds fuel to an ongoing debate on Capitol Hill whether to wind down the politically unpopular program or utilize its excess funds for broader economic recovery efforts.

In a letter sent to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, Geithner sought to quell political concerns by outlining a TARP “exit strategy” and narrowing the program’s focus to three specific areas in 2010: home foreclosure mitigation; small-business lending; and the Term Asset-Backed Securities Loan Facility (TALF) in order to facilitate lending through securitization markets.  According to Geithner, no TARP funds will be spent beyond these specific areas “unless necessary to respond to an immediate and substantial threat to the economy.”  In addition, the Capital Purchase Program – aimed at boosting bank lending through nearly $250 billion in direct capital injections – will cease.

Key to the administration’s TARP extension is the assumption that only $550 billion of the $700 billion program will be necessary for deployment, a figure buoyed by Treasury estimates that TARP-recipient banks could repay as much as $175 billion by the end of 2010.  Sanguine figures such as these have opened the floodgates to recent congressional proposals that would use TARP proceeds to create or expand economic recovery initiatives -- including a job-creation proposal outlined yesterday by President Obama – and, at the same time, remain budget-neutral.

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…But first, the House Rules Committee will meet this afternoon and Wednesday to consider nearly 250 amendments that have been filed to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), initiating a process that will set the parameters for a series of votes to occur during three days of floor consideration that could begin later this week.

Reflecting increasing pressure from Capitol Hill for the Obama administration to ramp up existing mortgage foreclosure prevention efforts, Rep. John Conyers (D-MI) and Zoe Lofgren (D-CA) have offered an amendment to H.R. 4173 that reincarnates a highly controversial provision—known as “cramdown”—which would allow bankruptcy judges to modify the terms of troubled mortgages.

Identical to the language passed by the House in March under the Helping Families Save Their Homes Act of 2009 (H.R. 1106), the Conyers-Lofgren amendment would authorize bankruptcy courts to modify mortgage repayment periods, interest rates and fees, and even the principal balance if a borrower provides evidence that efforts to complete a loan modification through the Obama administration’s “Making Homes Affordable” program have failed. Despite passage in the House, the cramdown legislation has twice been voted down in the Senate during separate votes in 2008 and 2009.

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The House Financial Services Committee yesterday completed work on the last pieces of its financial reform package, approving the systemic risk bill (H.R. 3996) and the Federal Insurance Office Act (H.R. 2609). Next Tuesday, December 8th, the House Rules Committee will reassemble into one large package all of the bills the Financial Services Committee considered separately. That package will include the two bills approved yesterday as well as legislation covering the Consumer Financial Protection Agency (H.R. 3795), over the counter derivatives (H.R. 3126), executive compensation and corporate governance (H.R. 3269), and mortgage reform and lending standards (H.R. 1728).

Financial Services Chairman Barney Frank (D-MA) is angling to have the omnibus reform package on the House floor on December 9th with at least three days of debate before the final vote. FR Watch is hearing from others on the committee that the date may slip to the following week. Frank said he anticipates the Rules Committee will approve ten additional, substantive amendments for consideration by the full House.

As the House is putting its package back together, the Senate Banking Committee is peeling apart the (Chairman Chris) Dodd draft so that bipartisan pairs of Senators can delve more deeply into assigned issue areas. Chairman Dodd (D-CT) and Ranking Member Shelby (R-AL) are focusing on the Consumer Financial Protection Agency. Senators Reed (D-RI) and Gregg (R-NH) are examining derivatives and credit rating provisions. Senators Schumer (D-NY) and Crapo (R-ID) are taking on corporate governance, investor liability, and executive compensation. Senators Warner (D-VA) and Corker (R-TN) are covering issues related to systemic risk.

The Senate Banking Committee has not yet scheduled any (financial reform-related) hearings beyond today’s nomination hearing for Fed Chairman Ben Bernanke, but it is safe to assume that the committee will be fixated on financial reform for the rest of December and probably well into the new year.
 

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• Full Text of Bill (PDF)
• Summary of Bill (PDF)

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On home improvement shows, it’s called the big “reveal.”  In Washington, the “reveal” is expected on Monday in the Senate Banking Committee with the much anticipated release of Chairman Chris Dodd’s (D-CT) omnibus financial reform bill. Rumors of its content have been leaking out for several days. Also being revealed --although it has been hinted at for weeks-- is the partisan divide that has opened up on Chairman Dodd's committee.

One of the most controversial elements expected to be in Dodd’s plan is the removal of bank supervisor authorities from the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, and the Office of Thrift Supervision in order to consolidate those authorities into one new super bank regulator. Neither the administration proposal nor House Financial Services Committee measures contemplated this approach. In fact, Financial Services Committee Chairman Barney Frank (D-MA) has criticized the concept because it does not “respect and preserve the dual banking system;” it undercuts the role of state bank supervisors; and it fails to preserve the role of the FDIC, an agency that Frank thinks is performing well.

Other expected provisions are a “Council of Regulators” approach to systemic risk; a Consumer Financial Protection Agency that will have oversight over most financial service products except for insurance or securities; credit rating agency reform; resolution authority for large financial institutions; and regulation of derivatives. Dodd plans to hold one or more hearings on his bill the week of November 16th and expects the committee to markup the bill after Thanksgiving.

Dodd has decided to move ahead without the support and assistance of Ranking Member Shelby (R-AL) and the other committee Republicans. Some are viewing this as a setback given that Dodd and Shelby had made a show in the past year of their shared views on some key parts of the financial reform agenda. Over the past six-to-eight weeks, as Dodd has pushed to pull the package together, it became clear the GOP side of the committee was reticent to come along. While this prevents the bipartisan approach Dodd had wanted, it does free him to take the bold approach it now appears we will see. Given the importance to his re-election of appearing to shake-up the financial establishment, Dodd may benefit from the freedom to stake out this turf. Whether that will contribute to the ultimate enactment of legislation remains to be seen.

Watch this space early in the week for a discussion of the outlook on the House side for continuation of the progress in assembling a comprehensive financial reform package.
 

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Gaining strong momentum after its passage out of the House Financial Services Committee last week, a bill crafted by Chairman Barney Frank (D-MA) to create a new Consumer Financial Protection Agency (CFPA) ran into a significant and unforeseen roadblock on Thursday – fellow Democrat and equally powerful House Energy and Commerce Chairman Henry Waxman (CA). In what could have been a routine markup of H.R. 3126, the Consumer Financial Protection Agency Act of 2009, the House Energy and Commerce Committee -- whose jurisdiction includes consumer protection and Federal Trade Commission oversight -- made dramatic changes to Frank's bill. One of the most obvious can be gathered from the amended bill's title: the Consumer Financial Protection Commission Act of 2009.

Waxman and the committee's Ranking Member Joe Barton (R-TX) collaborated on the manager’s amendment that would dramatically shift the agency’s governance from a single director to a commission led by a five-person bipartisan panel. Modeled after independent agencies like the Federal Communications Commission and the Federal Trade Commission, the chairman and commissioners would be nominated by the president, confirmed by the Senate, and serve staggered five year terms

Frank expressed sharp disapproval of the Waxman approach, referring to the commission model as “a big mistake” that will “weaken the capacity of the agency to provide consumer protection.” Frank defended the House Financial Services version as a balanced approach that allows a CFPA director to take prompt action, while at the same time, receiving the necessary recommendations and oversight from a board comprised of bank regulators and consumer groups. The differences may need to be resolved on the House floor. Waxman indicated he would have further changes during the floor debate, specifically removing some of the industry exemptions that were carved out by the House Financial Services legislation, including those for merchants, retailers and auto dealers.

The House Rules Committee will be the next stop for the bills where Chairman Louise Slaughter (D-NY) will execute the will of the House Democratic leadership and likely resolve the differences. It would not be in the best interest of the White House or congressional Democrats to have two of its most powerful chairmen battle over consumer protection on the House floor. The schedule is not yet posted, but the Rules Committee reconciliation could occur as early as next week.

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While Senate Banking Committee leaders Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL) have been engaged in a public display of bipartisanship about shaping comprehensive financial services reform legislation, it appears difficulties are arising in finding common ground on key issues. What we hear on Capitol Hill is that development of a detailed legislative proposal is now taking place almost exclusively on the Democratic side. GOP involvement has been minimal in recent weeks as Sen. Dodd's team seeks to pull together a draft piece of legislation.

The earlier goal of releasing a bipartisan draft in October and having a committee markup soon thereafter is proving elusive. Committee staff continues to work on a comprehensive measure including the controversial Consumer Financial Protection Agency (CFPA) and—one way or another—we expect something to emerge from that process in the next few weeks. Key committee members believe the CFPA is the one thing on which the Administration will draw a line in the sand, so opponents of that agency should not expect any early "give" on that front from the Democratic side. The major issues on that topic will center on the scope of the agency's authority and the powers it will have.

The issue of systemic risk regulation is under active discussion at the committee and it appears unlikely the Fed will be given that role. One indicator of the Fed's unpopularity at the committee these days is that there appears to be some reticence to move quickly on re-confirmation hearings for Fed Chair Ben Bernanke. Committee leaders would like to avoid hearings that might color the committee's deliberations on financial reform legislation. So even though his term is up at the end of the year, we would not be surprised to see Bernanke's reconfirmation delayed until after the New Year. He can stay in office beyond the expiration of his term, so there is no burning need to get the process completed right on time.

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Following last week’s unveiling of his newly-modified draft bill to create a Consumer Financial Protection Agency (CFPA), House Financial Services Chairman Barney Frank (D-MA) announced Wednesday his intention mark up the bill the week of October 12. While the philosophical debate between House Democrats and Republicans over the CFPA’s creation may be coming to a close, the debate amongst Democrats over the CFPA’s contours may be just beginning.

Federal preemption of state banking regulations is one of the first issues to divide Democrats. During Wednesday's committee hearing, Democratic lawmakers expressed concerns over a provision in Frank’s draft that would scrap federal preemption laws related to consumer protection. The Frank bill would have the CFPA set a minimum federal threshold and enable the states to set stricter rules if they choose. The potential exposure of nationally chartered banks to different consumer financial protection laws in every state is a prospect some fear would be overly cumbersome.

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In the spirit of football season—when trite gridiron analogies are abundant—the Federal Reserve exhibited an aggressive defensive stand this week, asserting its regulatory authority in the face of an administration proposal to curb its independence through the creation of a Consumer Financial Protection Agency (CFPA). This, coupled with the SEC actions yesterday—moving to ban flash orders that enable certain market participants to execute trades faster than everyone else and proposing new rules to crack down on credit rating agencies—suggests that regulators are beefing up their own authority to head off anticipated reform efforts on Capitol Hill. How well the agencies address the perceived regulatory gaps may have a significant impact on a legislative reform bill and could potentially slow down its momentum.

The Fed’s first defensive play came on Tuesday when it announced new regulatory policies that will extend its oversight to certain non-bank institutions, including many of the top originators of subprime loans. As part of the consumer compliance supervision program, the Fed will immediately begin overseeing the activity of non-bank subsidiaries of bank holding companies and foreign banking organizations, specifically by enforcing existing consumer protection laws and investigating all consumer complaints leveled against such entities.

The Fed’s second play – although reportedly still a few weeks from final completion – is the drafting of a proposal that will allow the Fed to reject bank compensation structures that the regulators believe could promote risky financial incentives and practices. According to the Wall Street Journal, the forthcoming proposal would allow the central bank to review and amend not only the compensation polices for executives, but also those for mid-level employees such as traders and loan officers, likely forcing banks to utilize “clawbacks” or mechanisms to reclaim the pay of employees who engage in risky behavior. The Fed is citing its existing regulatory authority over bank safety and soundness to impose its reach into the normal workings of corporate boards and bank executives. 

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Ample debate time in Washington can bring the good with the bad. As healthcare reform continues to dominate the congressional agenda leading into the fall, lawmakers have been granted an opportunity to finely tune the legislative details of financial reform—but also a window to resurrect previously rejected ideas from the dead.

This week, House Financial Services Committee (HFSC) Chairman Barney Frank (D-MA) announced his intention to include the so-called “cramdown” legislation into his chamber's broader financial reform package, injecting new life into a divisive proposal that would allow bankruptcy judges to modify mortgages by extending the term, reducing the interest rate, or writing down the principal amount.

During a HFSC subcommittee hearing yesterday to assess the progress of the Making Home Affordable (MHA) Program, Chairman Frank joined a chorus of lawmakers in expressing disappointment that the Obama administration’s loan modification program has not assisted more distressed homeowners. According to Treasury data, MHA has only modified the loans of 12 percent of eligible delinquent borrowers. Figures from some of the large banks are even lower, with Wells Fargo reporting 11 percent of eligible borrowers and Bank of America coming in at 7 percent. Despite the low percentages, the administration is citing statistics that the program has helped reduce the monthly payments of 350,000 homeowners since March.
 

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After a summer of raucous town hall meetings, the dip in President Obama's poll numbers, and the death of Senator Ted Kennedy, members of the House and Senate may well be relieved to return to the routine of the Washington legislative process. With all the turmoil already seen and now expected, there is a flavor of the circus being back in town.

We're actually picturing a three-ring circus— the "main ring" in the middle is where the health care debate is playing out. In the smaller rings we have climate change and financial reform. The action will shift back and forth at various times but all three rings will have their moments of action. While the ultimate fate of climate change legislation is very much in doubt, health care reform and financial reform are better bets to see final or near-final action in the next four months.

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Even Cabinet Members (maybe ESPECIALLY Cabinet Members) need an August break. Various media outlets have reported that Treasury Secretary Geithner delivered an expletive-laced tirade to the principal U.S. financial regulators during a meeting last Friday, in what sources say was a clear show of frustration over the internal opposition to some key elements of the Obama administration's financial regulatory proposal.

Fortunately, for inquisitive lawmakers, several of the meeting attendees were on Capitol Hill today to testify before the Senate Banking Committee on “Strengthening and Streamlining Prudential Bank Supervision,” including Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair, Federal Reserve Governor Daniel Tarullo, Acting Director of the Office of Thrift Supervision (OTS) John Bowman and Comptroller of the Currency John Dugan.

Confirming the veracity of the reports, the regulators were also unwilling to soften their criticism, as Bair and her fellow regulators expressed sharp resistance to the administration's proposal to consolidate the bank supervisory functions of the OTS and the OCC into a new National Banking Supervisor -- citing concerns that unified regulation would undercut the interests of community banks and would do little to close the most glaring regulatory gaps that occurred in the non-bank, or "shadow," banking system.

After hearing from the witnesses, Senate Banking Committee Chairman Chris Dodd (D-CT) openly speculated about the administration's plan, commenting that it is “…a thoughtful proposal but I wonder if it is the right prescription.”  Then again, Dodd’s comments may offer more insight on where his mind has focused these past several weeks than about the financial reform outlook.

The House adjourned last Friday and the Senate will adjourn this Friday for the August recess. Dodd is going home to face some challenging poll numbers as he gears up his 2010 re-election campaign. The opinion landscape is shifting rapidly, and legislators may come back in September with some different notions than they left with in August. One thing is for certain, it is going to be a very busy fall.

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The House of Representatives took the first steps towards enacting President Obama’s sweeping financial reform proposal today, voting 237-185 to approve the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) requiring all publicly-held companies to hold non-binding annual shareholder votes and expanding SEC authority over incentive-based compensation structures. Although the bill’s passage represents a major victory for the president and the Democratic Congress, it may prove to be the least controversial element of financial reform, as stark divisions remain on both sides of the aisle concerning the creation of a Consumer Financial Protection Agency and an expanded role for the Fed as a systemic risk regulator.

Unsurprisingly, this afternoon’s vote fell largely along party lines, with only two GOP members supporting the measure and 16 Democrats opposing. The House also approved, by a vote of 242-178, an amendment offered by Chairman Barney Frank (D-MA) that struck language prohibiting “clawbacks ” of executive compensation approved by shareholders. The amendment also inserted language that would prohibit clawbacks of incentive-based pay if a compensation agreement was in effect prior to this bill's enactment.

As the executive compensation legislation moves to the other side of the Capitol, conventional wisdom dictates that the Senate saucer will ultimately cool the House’s hot teacup – but this historical assumption may not apply for this bill.  The executive compensation debate was further inflamed yesterday following the release of New York Attorney General Andrew Cuomo's report showing that the nine largest U.S. banks paid out $32.6 billion in bonuses in 2008 -- a year in which total losses reached $81 billion and nearly $200 billion of taxpayer money was directly injected through the Troubled Asset Relief Program (TARP).  Moreover, a handful of lawmakers on the Senate Banking, Housing and Urban Affairs Committee currently facing tough re-election bids in 2010 – including Committee Chairman Christopher Dodd (D-CT) – will likely avoid putting themselves in a vulnerable political position by advocating reforms that deviate too much from the House legislation.

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Demonstrating that Congress intends to put its own stamp on financial reform legislation, House Democrats on July 8 introduced their own scaled-back version of the new consumer protection agency proposed by President Obama. Coming on the heels of the president’s release of draft legislation to create a new independent regulator for financial products and services, House Democrats responded quickly on Wednesday by unveiling the Consumer Financial Protection Agency Act of 2009 (HR 3126).

The bill was introduced by House Financial Services Committee Chairman Barney Frank (D-MA). While it retains many of the key provisions outlined within the White House bill—including the transfer of consumer financial regulations to the CFPA in order for the new agency to write and enforce rules on financial products of both banks and non-banks—it is notable for several significant differences from the Obama proposal that may limit the CFPA’s jurisdiction.

In particular, the House bill preserves the current regulatory enforcement structure for the Community Reinvestment Act (CRA), which is overseen by the Office of the Comptroller of the Currency (OCC), the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) in order to ensure that depository institutions are engaging in fair lending practices to low-income communities. Additionally, unlike the President’s bill, which assumes a merger with OTS and OCC to form a new prudential regulator titled the National Bank Supervisory (NBS), H.R. 3126 makes no mention of NBS. Frank’s press release goes on to state that the details of the President’s merger proposal will be considered “at [a] later date.”
 

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House Financial Services Committee Chairman Barney Frank (D-MA) changed the game yesterday with his announcement that the House would tackle financial reform by considering a series of smaller, targeted bills rather than a more comprehensive reform bill. Frank said he anticipates his committee will move four to six separate bills between July and the end of the year. First out of the gate will be legislation to create a new "Consumer Financial Protection Agency" proposed by the Obama administration.

With Frank’s Senate counterpart, Banking Committee Chairman Chris Dodd (D-CT), fully occupied managing health care legislation, the timeline continues to slip in the upper chamber. Frank remains committed, however, to working the major issues through his committee this summer, and has already scheduled thirteen hearings and markups for July.

There is little doubt Congress will impose new consumer protections on the financial service industry. Whether it will create a new agency to police them remains to be seen. Given budget concerns and other competing priorities, Congress may ultimately determine to enhance the consumer protection requirements, including simplified disclosure, within the existing regulatory framework of the SEC, FDIC, Federal Reserve, and the potentially combined Offices of the Comptroller of the Currency and Thrift Supervision.

House Financial Services Committee Schedule

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Now that everyone has had a day or more to digest the Obama administration’s plan for Financial Regulatory Reform, suggestions, questions, and critiques are coming from all corners. Here is a sampling of the top issues under discussion.

Systemic Risk Regulator –

Sen. Mark Warner (D-VA), who sits on the Banking Committee, objects to the plan’s expansion of the Federal Reserve’s role in managing systemic risk, believing it would concentrate too much power in one entity. Warner instead proposes the establishment of a Systemic Risk Council comprised of the Treasury, the Fed, and the other financial regulators that would, together with a permanent council staff, be able to assess and minimize risks comprehensively across the financial landscape. The House Republicans also prefer the council approach, proposing their own version – the “Market Stability and Capital Adequacy Board”-- last week.

Tier I Financial Holding Companies --

What companies will be considered Tier I Financial Holding Companies and subject to new regulation by the Fed? The Fed and Treasury are to establish the criteria, but some companies that are not currently subject to federal regulation might include General Electric, Berkshire Hathaway, State Farm Insurance, or even WalMart. Those not used to federal regulation will be given five years to ease into the new regime – the non-financial activity restrictions in the Bank Holding Company Act.
 

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Last month we were entertained by a Financial Service Primer set in Winnie the Pooh’s Hundred Acre Wood. Since then, Christopher Robin has unveiled his big plan to reform the financial services markets.  Please click below to read about financial reform through a different lens.

Another Romp Through the Hundred Acre Wood

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President Obama today released the long-awaited proposal for reform of the regulatory structure overseeing the financial services industry. It is a sweeping proposal with broad implications for the entire industry. It reshuffles regulatory powers, combines some agencies, creates a new one and extends federal regulatory powers to products and firms which are currently not federally regulated or regulated at all. Congress, the industry,the media and other stakeholders are poring over the 85-page "white paper" describing the proposal. Click here to go to the document.
 

Brief Summary

1.      Avoid Future Systemic Risk/Promote Robust Supervision and Regulation – Raise capital and liquidity requirements for banks and systemically significant financial firms; establish a Financial Services Oversight Council of regulators to coordinate and prevent systemic risk; establish a new National Bank Supervisor in Treasury to oversee federally chartered banks; bring hedge funds and other private pools of capital into the regulatory framework; require public companies to hold non-binding say-on-pay shareholder votes and have independent compensation committees; review accounting standards; establish the Office of National Insurance within Treasury to enhance oversight of the sector.

2.      Reform the Structure of the Financial System – impose “robust” reporting requirements on issuers of asset-backed securities; reduce reliance on credit rating agencies; require the originator, sponsor or broker of a securitization to retain a financial interest in its performance; harmonize the regulation of futures and securities; safeguard payment and settlement systems; subject all derivatives trading to regulation; strengthen oversight of systemically important payment, clearing and settlements systems.

3.      Protect Consumers and Investors – improve the SEC’s ability to protect investors and establish a new Consumer Financial Protection Agency to identify gaps in supervision and enforcement; ensure the enforcement of consumer protection regulations; improve state coordination; and promote consistent regulation of similar products.

4.      Enable the Government to Manage Financial Crises -- establish a resolution mechanism, similar to the FDIC’s,  for non-bank financial firms and subject those whose failure could harm the financial system (Tier I Financial Holding Companies) to Fed supervision; require the Fed to get Treasury sign off when the Fed invokes its emergency lending authority for “unusual and exigent circumstances.”

5.      Improve International Supervision and Coordination – improve oversight of global financial markets; strengthen the capital framework; coordinate supervision of international firms; enhance crisis management tools.

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President Obama is today releasing his plan for a new regulatory structure to mitigate risk in the financial marketplace. Please click here to see the proposal from the Administration. Financial Reform Watch will be posting analysis shortly.
 

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Tired of being labeled as obstructionists, Republicans on the House Financial Services Committee on Thursday issued their plan for financial regulatory reform. Led by the committee’s Ranking Minority Member Spencer Bachus (R-AL) and TARP Congressional Oversight Committee member Jeb Hensarling (R-TX), the Republican solutions stem from three principles – prevent any future Wall Street bailouts; stop the government from picking winners and losers in the financial system; and restore market discipline.

While the Republican plan does not address every issue -- most notably missing is insurance regulation – those included represent a consensus view within their caucus. Bachus described their plan as a “line in the sand” from which Republicans can negotiate with the Democrats. Hensarling, who before coming to Congress served on the executive compensation committee of a company publicly traded on the New York Stock Exchange, was particularly critical of the latest push to regulate compensation. A better approach, Hensarling believes, is the creation of a new “Market Stability and Capital Adequacy Board,” which would be charged with flagging risky practices across the board. The Republicans offered as an example the practice of rewarding loan originators for loan volume with no regard to loan quality, saying that such a board would have been able to halt that.

The White House plans to release its comprehensive reform plan on June 17th. Will the Obama administration give a nod to bipartisanship by including a few elements of the Republican plan? Financial Reform Watch will compare and contrast the plans later this week.

Central Elements of the Republican Plan

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The European Commission yesterday put forward its framework proposal on Financial Supervision in Europe. The proposal covers a set of far-reaching reforms to the current architecture of supervisory committees, with the creation of a new European Systemic Risk Council (ESRC) and European System of Financial Supervisors (ESFS), composed of new European Supervisory Authorities. Legislation to embody these proposals will follow in the autumn and will thus be finalized under the leadership of new Commissioners who will be appointed during the summer.

With this initiative, the Commission is responding to the weaknesses identified during the financial crisis as well as to the G20 call to take action to build a stronger, more globally consistent, regulatory and supervisory system for financial services. The proposed financial supervision package involves two key elements.

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In which we look back at an action-packed hundred days of change in an allegorical-ish kind of way. Please click here to read how a cast of characters who may seem very familiar has dealt with some very large-ish problems.
A Story of a Hundred Days

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In a letter to House and Senate leaders yesterday, Treasury Secretary Timothy Geithner proposed amending the “Commodity Exchange Act , the securities laws, and other relevant laws” to enable the government “to regulate the OTC [over-the-counter] derivatives markets effectively for the first time.” A related Treasury press release explains, “As the AIG situation has made clear, massive risks in derivatives markets have gone undetected by both regulators and market participants. But even if those risks had been better known, regulators lacked the proper authorities to mount an effective policy response.”

The Obama Administration therefore proposes changing laws, rules, and practices in order to put in place the following requirements aimed at minimizing risk to the financial system; promoting efficiency and transparency; preventing fraud and market abuses; and protecting against the inappropriate marketing of OTC derivatives to “unsophisticated parties”

• Clear all standardized OTC derivatives through regulated central counterparties (CCP), which are to impose robust margin requirements and necessary risk controls.
• Subject OTC derivatives dealers and firms that create large exposures to counterparties to a “robust regime of prudential regulation” to include—conservative capital requirements; business conduct standards; reporting requirements; and initial margin requirements with respect to bilateral credit exposures
• Authorize the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to impose—recordkeeping and reporting requirements; requirements for trades not cleared by CCPs to be reported to a regulated trade repository; obligations on the CCPs and trade repositories to make aggregate data on open positions and trading volumes publicly available and individual counterparty’s trades and positions available to federal regulators; moving standardized trades onto regulated exchanges and regulated transparent electronic trade execution systems; the development of a system for timely reporting of trades, prices, and other trade information.
• Give the CFTC and the SEC the authority—to police fraud, market manipulation, and other market abuses; to set position limits on OTC derivatives that perform or affect a significant price discovery function with respect to futures markets; and to gather the complete picture of market information from CCPs, trade repositories, and market participants for market regulators.
• Strengthen the laws and participation limits to ensure that OTC derivatives are not marketed inappropriately to “unsophisticated parties.” The CFTC and SEC are reviewing current participation limits to recommend tighter limits or increased disclosure requirements related to marketing derivatives to counterparties “such as small municipalities.”

House Financial Services Committee Chairman Barney Frank (D-MA) and Agriculture Committee Chairman Colin Peterson (D-MN), whose committee has jurisdiction over the CFTC, released a joint statement welcoming the Treasury proposals and committing to working together to achieve “strong, comprehensive, and consistent regulation of OTC derivatives.”

Treasury: Letter to Harry Reid Re: Regulatory Framework for OTC Derivatives (PDF) 

Treasury: Press Release Re: Regulatory Reform for OTC Derivatives

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The United States and EU Member States are steadily chipping away at the iceberg that is the global financial crisis. The European Parliament on Wednesday approved the so-called “Solvency II” Directive, which, if also approved by the Council of Ministers, constitutes a significant change in EU insurance and reinsurance law. Solvency II is designed to improve consumer protection, modernize supervision, and deepen market integration. Insurance groups would have a dedicated “group supervisor” that would enable better monitoring of the group as a whole.

Commission President José Manual Barroso said:

"Solvency II will help protect policy holders from bad practice. It will help shield our economies against a repeat of the disastrous excessive risk taking by financial institutions, including certain insurance operators, that has contributed to the global crisis."

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The G20 meeting has slipped quietly below the water line as a news story in the United States—replaced by Michelle Obama's star power, the North Korean rocket, and the NCAA basketball championships. However, there are still some ripples from it moving across the seascape of U.S. politics.

In Europe, on the other hand, policy proposals are being drafted and, sometimes leaked, to gauge the views of constituents. The EC Commission’s proposal (though it has yet to be formally adopted) concerning regulation of private equity and hedge funds, an issue also hotly debated at G20, found its way into the media today—managers of hedge funds and private equity funds need to be registered while their funds must hold a minimum level of capital and also disclose information on borrowing to regulators.

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International summits are frequently more about atmospherics than they are about substance. The G20 meeting just concluded in London was no different from the norm. On a substantive level, the most consequential outcomes were the $750 billion in IMF capitalization ($500 billion in loans and guarantees and $250 billion in Special Drawing Rights) to aid emerging nations, $250 billion in trade credits from the IMF, and $100 billion in loans from other multilateral institutions. Certainly a substantial allocation of resources, but hardly a package that required heads of government for approval.

What did require the presence of the leaders of these nations was the display of common purpose that emerged from the meetings. While no concrete steps were agreed to, the mutual commitments to expand trade, tighten financial regulation, establish global monitoring systems and support greater transparency in executive compensation demonstrate a recognition of many of the key elements that led to the current crisis. The communiqué issued at the conclusion of the meeting touches on all these issues.

While not a crucial issue in the discussions, the matter of regulation of tax havens came into focus in the American media because of President Obama's reported role in bridging a divide between French President Nicholas Sarkozy and Chinese Premier Hu Jintao. According to an account from the White House that was corroborated by French and German government sources, Obama pulled the two leaders aside, first separately and then together, to negotiate a language change that papered over the differences that had emerged between the two during the group discussions. American media have reported widely on this sideshow because it is viewed as reflective of the difference in style between this U.S. President and his predecessor.

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The House of Representatives approved yesterday, by a vote of 247 to 171, the “Pay for Performance” bill (H.R. 1664), which would prohibit TARP recipients from paying “unreasonable or excessive compensation” to its employees. The legislation tasks the Treasury Department with defining exactly what is “unreasonable or excessive.” The bill also repeals the controversial amendment in the American Recovery and Reinvestment Act that exempted bonuses based on employment contracts dated prior to February 11, 2009. While this is a far cry from the AIG-targeted bill the House passed earlier— imposing a 90 percent excise tax on AIG bonuses—H.R. 1664 is one more example of government treading into traditionally private sector turf.

The legislation applies to companies that have outstanding capital investments from the TARP or through the Housing and Economic Recovery Act, which covers Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition to prohibiting unreasonable or excessive compensation, affected companies could not pay bonuses or other supplemental payments not directly based on performance standards set by Treasury. The Treasury Secretary has the authority to exempt community investment institutions and institutions receiving less than $250 million from the TARP. The legislation also directs Treasury to establish a payback process for those institutions that would prefer to return the government’s money rather than be subject to the new compensation rules. For those institutions subject to the rules, the bill requires them to submit an annual report to Treasury with the number of employees whose compensation falls into each of these categories: over $500,000; over $1 million; over $2 million; over $3 million; and over $5 million.

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On Monday's post, we pointed out the potential for posturing at the G20 due to the high stakes and the short-meeting format. On Tuesday, French President Nicholas Sarkozy threatened to walk out of the meeting if there was not agreement on strong international regulation of financial markets.

The draft communiqué for the meeting, which has been circulating for several days, includes a call for broader regulation of hedge funds and other financial firms and products but leaves unclear how strong international regulatory bodies would be in relation to national ones. President Obama is certain to resist any effort to include language that would suggest placing an international body in a superior position to US agencies. If Sarkozy were to make good on his threat, it is difficult to predict who would be injured.

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In 1961, a young American president made his first trip abroad to confront the major international issue of the day. History has judged that his perceived weakness on that trip led to serious troubles down the road. That chain of events has echoed through the presidencies of each man who has followed John F. Kennedy. It echoes today as President Obama prepares to make his first foreign trip since taking office. While the American press is playing up the G20 as a confrontation between American-style capitalism and a more social-democrat model, the Obama administration seeks to play down the drama by saying there is no need for all G20 leaders to agree on the specifics of recovery policies. However, there may be leaders at the meeting who see an advantage in setting themselves apart from the U.S. approach to recovery, in particular with regard to stimulus. If some seek confrontation, President Obama will be under pressure to push back and be perceived at home as having "stood up" to the world.

The potential for posturing at the G20 is increased by the fact that this is a one-day meeting. There will be no time for venting followed by a cooling off period and then a coming together around common goals. Each leader will walk into the meeting with a plan and the opportunity for adjustment during the day will be limited.

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On Thursday, U.S. Treasury Secretary Tim Geithner unveiled the Obama administration’s comprehensive framework for reforming the regulation of the financial system. The plan will be a hot topic ahead of next week’s G20 summit in London and is being closely scrutinized in capitals worldwide.

In his testimony yesterday before the House Financial Services Committee, Geithner told the panel,

“Our hope is that we can work with Europe on a global framework, a global infrastructure which has appropriate global oversight, so we don't have a Balkanized system at the global level, like we had at the national level."

He added that that the financial sector needs to be tightly regulated so that it can never again threaten the collapse of the wider economy.

Geithner said the administration is first focusing on systemic risk because the issues around it require the most global cooperation and will be at the center of the G20 agenda. Clearly, the Obama administration is moving towards a position that would enable substantive discussions with European leaders. Such discussions may result in new roles and powers for international organizations, including the Financial Stability Forum and the International Monetary Fund (IMF).

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Following a cautiously, positive welcome of the Obama Administration’s “toxic asset” plan to revive banking activity earlier in the week, the U.S. President yesterday evening delivered a speech that included comments on the G20 preparations. A few hours earlier, the French President Sarkozy had delivered a keynote speech with some striking similarities but also with a few, noticeable, differences.

President Sarkozy re-emphasized his statements from September 2008, which some observers at the time regarded as exaggerated, that the financial crisis is unprecedented in its scope, that nobody knows when or how it will end, but that the world will look different once it is over. He went on to underline that the crisis, in his government’s view, is both an intellectual and a moral one and that a more “moral” capitalism will have to emerge as result. Sarkozy, unsurprisingly, put government action and intervention at the center of the required policy response, which is not inconsistent with the Obama administration’s policy response.

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The Obama Administration has stepped up its preparation for the G20 summit next week by moving on two fronts—a plan to purchase toxic assets from banks and a new regulatory regime for financial products and companies. Taken together, these emerging plans appear designed to allow President Obama to come to London saying the U.S. has addressed the three major pillars of a recovery program—stimulus, bank rescue and regulatory reform .

Today's announcement by Treasury Secretary Geithner of the plan for toxic assets follows the broad outline he announced to poor reviews last month. The stock market's swoon after the previous Geithner announcement was blamed on the lack of detail he offered. Today, Geithner described how a program of up to $1 trillion to relieve banks of bad assets will be managed. Based on a public/private partnership concept, the Geithner plan allows for the participation of hedge funds and private equity funds as managers of portfolios of assets. Those managers will have the opportunity to make significant profits if they are successful in selling those assets back into a healthier market in the future. The government will also share in those profits. The reaction of the media and Congress to this plan bears watching. They will focus immediately on the issue of executive compensation for managers participating in the program and on the issue of allowing the very kind of firms that helped create the mess to make a profit on cleaning it up. Careful selection of managers will be crucial.

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Congress took the first major step yesterday in levying heavy taxes on bonuses paid to executives of AIG and to institutions who have been recipients of significant (more that $ 5 billion) assistance from the Troubled Asset Relief Program (TARP) in recent months. In a move best described as spasmodic, the House voted 323-93 to place a 90 percent tax on the bonuses of TARP-recipient executives with adjusted gross incomes over $250,000.

Senate Majority Leader Harry Reid (D-NV) moved to bring the legislation to the floor yesterday, but Sen. Kyl (R-AZ) blocked the attempt, saying the Senate needs more time to consider the ramifications. Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) introduced a bill late yesterday that would impose a 70 percent excise tax—35 percent on the TARP recipient companies and 35 percent on their executives—on excessive bonuses, defined as anything exceeding $50,000 in a calendar year.

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Over the past months, the G20 has gone from being regarded as yet another over-sized talk shop with little clout to becoming one of the main vehicles for a global response to the crisis.

With stakeholders now hosting increasing and sometimes contradicting expectations, there is a risk that the summit will become a victim of its own success. However, even with an outcome that falls short of producing broad consensus on an all issues, significant progress will have been made if the result is the firm establishment of G20 as the primary, global forum to deal with the crisis.

The G20 preparations now involve the full range of international organizations, trade blocs and stakeholders. The British Government's Business and Enterprise Department and the Confederation of British Industry, the UK's largest business organization, co-hosted a special summit of business leaders from G20 countries—chaired by Lord Peter Mandelson, the Business Secretary—in London on March 18. Separately, the UK Financial Services Authority presented the long-awaited Turner Report with proposals that, if enacted, will introduce dramatic changes to the regulatory framework that governs the City.

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The G20 meeting is fast approaching and has become the single most important focal point for the global efforts to tackle the financial crisis.

The EU has sought to develop a common program for the G20 and to hammer out the main differences between diverging European interests. While nothing should be taken for granted, it seems plausible that the EU States will be singing from a common hymn sheet in London and that they will be defending a joint set of proposals. Their purpose appears to be to advance the cause of global regulation of financial markets.

The EU framework appears to be following the template laid out in the de Larosiere Report, to which we referred in last week’s international update. Following its publication—including 31 proposals providing a comprehensive set of concrete solutions for regulatory, supervisory and global repair action—the EU Commission reaffirmed that:

“the crisis has exposed unacceptable risks in the current governance of international and European financial markets which have proved real and systemic in times of serious turbulence . . . Market surveillance and enforcement of contractual and commercial practices will play an important role in restoring consumer confidence in retail banking.“

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There was plenty of activity in Washington this week but none of it enough to settle the roiling stock market, which keeps sinking like a rock. Is there too much activity or not enough of the right kind of activity?

From the White House and the Treasury—The Obama Administration released the details of its “Making Home Affordable” program, which was introduced in February. With incentives for mortgage holders and servicers, audit and documentation requirements, and qualification limits, major industry players such as the Mortgage Bankers Association and the American Bankers Association reacted positively to the new details.

From the Treasury—Secretary Tim Geithner was on Capitol Hill most of the week defending and explaining the president’s budget proposal, especially the $250 billion “contingent reserve” amount in the Treasury budget to support up to $750 billion worth of asset purchases. Geithner assured the Senate Finance Committee that the $750 billion is not an estimate of future rescue efforts, but rather “just a recognition of reality that it’s possible we’re going to need to do this with more resources.” The Secretary promised to provide more details in the coming weeks on future bailout efforts, including plans for the remaining $300 billion of TARP funds, and the eagerly anticipated public private partnership to take on troubled assets.

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In his visit to the White House this week, British Prime Minister Gordon Brown called for a global "New Deal" for financial industry regulation. While harmonization is always tricky across international borders, the outline of just such a new regulatory regime may have taken shape with the release last week of the long-awaited de Larosière report in Europe.

The analysis and recommendations outlined in the de Larosière report attempt to provide for a comprehensive view, and despite being quite drastic by many measures, most commentators seem to approve of the group’s recommendations. Some observers believe that the group should have gone even further.

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Some surprises were included in today's announcement by the Federal Reserve and the Treasury on new developments with the soon-to-be $1 trillion Term Asset-Backed Securities Loan Facility (TALF). Of particular note is the statement that the two agencies will push for legislation to re-tool the program.

According to the joint release, the TALF is “designed to catalyze the securitization markets by providing financing to investors to support the purchase of certain AAA-rated asset-backed securities” and will at first be limited to newly and recently originated auto, credit card, student, and SBA-guaranteed small business loans. The TALF funds will go out monthly starting in March, and they are already anticipating a program expansion for April that will include “asset backed securities (ABS) backed by rental, commercial, and government vehicle fleet leases and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment.” The Treasury and the Fed are also analyzing how to expand the program in future months to include commercial mortgage backed securities and other AAA-rated, newly issued ABS.

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The New Democrat Coalition is not especially new, but the recent changes resulting from the 2008 elections and the financial crisis have given it new prominence and increased importance in the House of Representatives. The New Dems may be the moderating force behind financial regulatory reform in Congress. Already, several of its centrist members helped stall the mortgage cramdown legislation that was scheduled for a House vote yesterday and is now pushed out to next week to allow for changes that can attract additional votes from moderates.

Founded in 1997, the New Democrat Coalition is “committed to enacting policies that encourage economic growth, maintain U.S. competitiveness, meet the new challenges posed by globalization in the 21st century, and strengthen our standing in the world.” With 67 Democratic House members, sixteen of whom are on the House Financial Services Committee, the coalition is taking on “regulatory reform of the financial services industry” through its Financial Services Task Force. It is chaired by Reps. Melissa Bean (D-IL) and Jim Himes (D-CT), who both have business backgrounds, and Himes is an alumnus of Goldman Sachs. The New Dems Chairwoman, Rep. Ellen Tauscher (D-CA), is a former investment banker who was one of the first women ever to hold a seat on the New York Stock Exchange.

The group just released its 21 principles for financial regulatory reform organized around the goals of efficient and effective regulation; market stability and transparency; and robust consumer and investor protection. One principle shows a willingness to reform the way in which mark-to-market accounting rules are applied, something that House Republicans have wanted to do for months. Perhaps the New Dems can help revive the bipartisanship that has been lacking in the House thus far this year.

New Democrat Coalition's 21 Principles for Reforming the Financial System (PDF)

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Testimony from academics and industry during today’s House Financial Services Committee hearing produced broad bipartisan consensus that the current regulatory structure is outdated. Testifying on behalf of industry were leaders from the Independent Community Bankers Association (ICBA), the Financial Services Roundtable, the American Bankers Association (ABA), and the Securities Industry and Financial Markets Association. As the committee’s first major hearing following the federal financial rescue efforts, it covered a wide swath of issues outlined below. 

• Creation of a Select Committee on Financial Reform—Chairman Barney Frank and several members supported this idea. In addition to Financial Services Committee members, a select committee would include members from the House Committees on Oversight and Government Reform, Agriculture, and Ways and Means. One of the academic witnesses, University of Rochester President Joel Seligman, suggested a commission modeled after the 9-11 Commission. 
• Derivatives—What role did credit default swaps play in the financial crisis? Should there be increased capitalization requirements for derivatives’ issuers? The questions remain, but most agreed on the need for increased oversight of complex financial derivatives. 

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The Senate passed the financial reform package tonight by a vote of 74 to 25. We'll have more analysis in the morning and a look ahead to House action.

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With confidence in Senate passage running high, Washington's attention -- and Wall Street's -- is turning back to the House. House Majority Whip James Clyburn (D-SC) told reporters this afternoon that he expects the House to vote on the Senate rescue package on Friday. On Thursday, the House will likely debate the "rule" for the package, which dictates whether and how members can amend the legislation.

Discussion today has focused on the impact in the House of the items the Senate is adding to the legislative package. The calculus involved is illustrated by looking at one of the "add-ons," the one-year fix for the alternative minimum tax (AMT). If Congress does not alter the AMT, as many as 22 million additional taxpayers, including many middle income taxpayers, could confront it in April. The House recently voted on a stand-alone AMT relief bill on September 24, and 393 members voted for it – 200 Democrats and 193 Republicans.

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Senate leaders this morning assembled the legislative package that contains the financial rescue plan on which the Senate will vote today.  Senate Banking Committee Chairman Chris Dodd (D-CT) only added one new provision to the Economic Stabilization and Recovery Act of 2008.  The new Section 136 amends the Federal Deposit Insurance Act and the Federal Credit Union Act to increase temporarily deposit and share insurance respectively to $250,000 from the current $100,000.  This authority only runs through December 31, 2009.
 
The financial rescue legislation has exploded from the 109 page bill considered by the House to a 451 page amalgam, thanks to the additions of the tax extender package – H.R. 6049, which the Senate passed on September 23rd by a vote of 93 to 2 – and the Paul Wellstone Mental Health and Addiction Equity Act, H.R. 1424.  The mental health bill is the actual vehicle, and if the Senate passes the bill tonight as expected, the House will vote on the new H.R. 1424 tomorrow, most likely. 

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Last night Senate leadership announced that the Senate will vote today on the financial rescue plan. The only substantive change announced to the previous package was the lifting to $250,000 of the cap for FDIC insurance coverage of deposit accounts.

Sen. Chris Dodd (D-CT), Chair of the Senate Banking Committee, said he will offer an additional amendment, but that it will only include "agreed upon" items.

In a move that may complicate things somewhat, the Senate has also attached to the package a tax break extender bill covering a number of provisions. This legislation has been "ping-ponging" around the Capitol for months, with the House and Senate leaders differing over the approach.
 

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House and Senate negotiators and the Administration reached a deal overnight on the financial rescue package. Staff has spent a sleepless night drafting and a vote in the House is expected as early a this evening.

Our next report will have more details, but the plan does include the following

• A total of $ 700 billion for investment in troubled assets.
• A phased approach to releasing funds as described in our report last evening.
• A requirement for the president to submit a plan for recouping lost funds if the program does not turn a profit upon the sale of assets.
• Limits on "golden parachutes" for executives of forms from which assets are purchased.

The other elements are largely along the lines readers of these reports will expect.

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In a day of fast-moving developments there are some signs that discussions on a financial rescue package may re-start in a constructive way. According to Sen. Harry Reid (D-NV), House Republicans have agreed to return to the negotiating table at the noon hour under the leadership of House Minority Whip Roy Blunt (R-MO). To the extent the conversation is required to reach a compromise, this is a sign of progress in getting to a deal. Blunt will be bringing with him an outline of the House GOP plan to deal with the financial crisis. The key elements of that plan are the following:

• Federal insurance of mortgage-backed securities (in addition to the insurance already provided to Fannie Mae and Freddie Mac products). Premiums paid by asset owners would support the program.
• Regulatory and tax relief for the financial industry (e.g ability to suspend dividend payments).
• A cut in the capital gains tax.
• Greater transparency in reporting of the types of assets held by financial institutions and greater SEC scrutiny of audit reports.

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Momentum continues to build for enactment of the $700 billion Administration plan to buy troubled assets from financial institutions. As an indicator of the increasingly upbeat mood around the package, the Dow Jones Industrial Average increased by over 200 points for the day.

As we write this, President Bush is meeting with Sens. McCain and Obama and Congressional leaders to discuss how to advance the plan. While this meeting is viewed by many as a sideshow, a forceful statement by the sitting president and the two men seeking to replace him will add to the overall sense that action on Capitol Hill is soon possible.

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The Treasury Department this past weekend submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system.

The following description reflects Treasury's proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

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