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

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Act provides the most sweeping overhaul of the regulation of the U.S. financial services industry and financial markets since the aftermath of the Great Depression. The Act represents Congress’ attempt to address the myriad of issues arising out of the financial crisis and marks the conclusion of over a year’s effort to craft a legislative solution designed to avoid another financial crisis. The legislation requires an overhaul of the regulatory landscape and establishes a new regulatory scheme to govern certain public companies, banks, insurance companies, hedge funds, as well as other companies in the financial services industry.

The new legislation is designed to address systemic risk in the U. S. financial system and remediate the “too big to fail” issues which required government bailouts of several large financial services companies during the financial crisis. The legislation also implements new corporate governance and disclosure requirements applicable to public companies, increases the regulatory requirements applicable to banks, insurance companies and hedge funds and subjects certain large financial services companies to regulation by the Federal Reserve Board (the “FRB”).

The new legislation adds several new corporate governance and disclosure requirements applicable to companies listed on U.S. stock exchanges and in some instances, other publicly-traded companies, including:

• a requirement for having a non-binding shareholder vote on compensation of specified executive officers and in certain instances golden parachute provisions;
• a requirement for more stringent rules and disclosure applicable to compensation committees;
• a requirements for additional disclosure requirements related to executive compensation;
• the elimination of discretionary voting by brokers in connection with the election of directors, executive compensation issues or other significant matters;
• authorization for the SEC to adopt rules related to proxy access; and
• a requirement to adopt clawback policies with respect to employment arrangements of executives of companies seeking to list on a U.S. stock exchange.

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On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Act provides the most sweeping overhaul of the regulation of the U.S. financial services industry and financial markets since the aftermath of the Great Depression. The Act represents Congress’ attempt to address the myriad of issues arising out of the financial crisis and marks the conclusion of over a year’s effort to craft a legislative solution designed to avoid another financial crisis. The legislation requires an overhaul of the regulatory landscape and establishes a new regulatory scheme to govern certain public companies, banks, insurance companies, hedge funds, as well as other companies in the financial services industry.

The new legislation is designed to address systemic risk in the U. S. financial system and remediate the “too big to fail” issues which required government bailouts of several large financial services companies during the financial crisis. The legislation also implements new corporate governance and disclosure requirements applicable to public companies, increases the regulatory requirements applicable to banks, insurance companies and hedge funds and subjects certain large financial services companies to regulation by the Federal Reserve Board (the “FRB”).

The new legislation adds several new corporate governance and disclosure requirements applicable to companies listed on U.S. stock exchanges and in some instances, other publicly-traded companies, including:

• a requirement for having a non-binding shareholder vote on compensation of specified executive officers and in certain instances golden parachute provisions;
• a requirement for more stringent rules and disclosure applicable to compensation committees;
• a requirements for additional disclosure requirements related to executive compensation;
• the elimination of discretionary voting by brokers in connection with the election of directors, executive compensation issues or other significant matters;
• authorization for the SEC to adopt rules related to proxy access; and
• a requirement to adopt clawback policies with respect to employment arrangements of executives of companies seeking to list on a U.S. stock exchange.

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By a vote of 237-192, the U.S. House of Representatives tonight passed the conference report for the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Senate must also approve the legislation before it can go to the president for his signature. The Senate is expected to take up the measure when it returns from the Independence Day recess the week of July 12th.

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With the clock ticking on a self-imposed deadline for the completion of House and Senate conference negotiations, House Financial Services Chairman Barney Frank (D-MA) did his best impersonation of (soccer star) Landon Donovan early Friday morning, clearing a conference report that will bring Congress one step closer to passing the most sweeping financial regulatory reform legislation in nearly a century. 

Capping off two weeks of publicly-televised conference committee negotiations that included a nearly 24-hour marathon session on the final day, House conferees voted 20-11 and Senators voted 7-5 to approve the measure on party lines; and provided President Obama with a critical victory prior to this weekend’s G-20 Summit in Toronto.

Below are the key issues that were resolved in conference committee on Thursday:

Derivatives
A broad array of industries, both inside and outside the financial sector, anxiously awaited the conferees’ response to controversial Senate language authored by Sen. Blanche Lincoln (D-AR) that would require banks to spin-off or “wall off” their swaps operations. After many weeks of behind-the-scenes negotiations -- including a contentious session yesterday in which House Democrats threatened to pull their support for the overall bill if the Lincoln language was included -- conferees ultimately agreed to a watered-down version that allows banks to continue trading with certain derivatives that are deemed less risky. Under the proposal offered by House Agriculture Committee Chairman Collin C. Peterson (D-MN), derivatives tied to interest rate swaps, foreign exchange swaps, gold and silver, and investment-grade credit default swaps will be exempted from the prohibition, while derivative trading related to agriculture, commodities, energy, equities, metals, and below-investment-grade credit default swaps must be walled off from a bank’s federally insured deposits.

Volcker Rule
Aside from the derivatives title, the debate surrounding the “Volcker Rule” -- or the proposed ban on proprietary trading for banks and bank holding companies -- proved to be the most contentious item on the conferees’ agenda in the final week. In the end, negotiators agreed to strengthen the Volcker Rule provisions by incorporating language offered by Senators Carl Levin (D-MI) and Jeff Merkley (D-OR) that would strip the ability of regulators to halt the Volcker Rule‘s implementation. However, in deference to the wishes of Sen. Scott Brown (R-MA)—who was one of only four Republicans to vote for the financial reform bill in the Senate— the final language would allow banks to engage in proprietary trading activities with up to three percent of their tangible common equity.

Banking Capital Standards
Another major agreement involved language authored by Sen. Susan Collins (R-ME) that would limit the ability of banks to use commonly held securities known as “trust-preferred” to meet capital requirements. Although House Democrats sought a 10-year phase-in for financial institutions with assets between $15 billion and $100 billion, negotiators agreed to a five-year phase-in period for $15-$100 billion institutions and a full exemption for those with less than $15 billion.

Corporate Governance
Conferees decided to retain a Senate provision that requires publicly-trade companies to grant certain shareholders -- those owning five percent of the outstanding shares for at least two years -- to nominate and elect members of the board of directors through a proxy vote.

Levy on Banks and Hedge Funds
In order to defray the legislation’s projected $22 billion cost -- as estimated by the Congressional Budget Office -- conferees approved last-minute language that would allow the Federal Deposit Insurance Corporation (FDIC) to levy fees on financial institutions with assets of $50 billion or more and hedge funds with managed assets of over $10 billion.

The House and Senate are expected to vote on the final conference report next week -- which is not subject to further amendment -- before sending it on to the White House for President Obama's signature and enactment into law .
 

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After gaveling in day six of financial reform conference negotiations, House Financial Services Committee Chairman Barney Frank (D-MA) reaffirmed this afternoon his goal of completing conference negotiations by June 24, stating that conferees will “stay [on Thursday] until we’re finished.”

Despite a handful of controversial issues that await consideration this week—including the scope of the so-called “Volcker Rule,” heightened banking capital standards and more stringent regulations for financial derivatives—both Frank and Senate Banking Committee Chairman Christopher Dodd (D-CT) appear increasingly determined to wrap up conference negotiations before President Obama travels to Toronto for this weekend’s G-20 Summit. According to Frank, any potential delays would undercut the president’s leverage at the G-20 and cause further uncertainty for global financial markets. If Frank and Dodd meet their timeline it will likely set up House and Senate floor consideration of a conference report next week.

Consumer advocates secured a significant victory on Tuesday, as conferees came to a general agreement regarding the size and scope of a newly-created Consumer Financial Protection Bureau (CFPB), which will be housed in the Federal Reserve and will be funded independently. An agreement also appears imminent regarding an exemption from CFPB regulation for auto dealers. Although House conferees are seeking a blanket exemption, Chairman Dodd has offered to allow the CFPB to issue rules that apply to auto dealers under the Truth in Lending Act, while the Federal Reserve would have discretion as to whether or not it enforces such rules.

Today, conferees are examining prudential banking regulation under Title 6 of the bill—which includes the Volcker Rule. Conferees are expected to consider an amendment offered by Senators Carl Levin (D-MI) and Jeff Merkley (D-OR) that would explicitly prohibit banks and bank holding companies from engaging in proprietary trading activities, as opposed to the current Senate language that provides latitude to regulators over the Volcker Rule’s implementation. In addition, Senator Scott Brown (R-MA)—who was one of only four Republicans to vote for the financial reform bill in the Senate—is lobbying conferees to include an exemption from the Volcker Rule for non-bank mutual funds and insurance companies.

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With several issues leftover from last week and several more controversial ones on the agenda this week—such as the Consumer Financial Protection Agency and derivatives—it may be a challenge for the congressional conferees to finish their work by the Fourth of July. In addition to sorting out the policy issues, Congress also has to get through certain procedural hoops before the financial regulatory reform proposals become law.

July 4th is the quoted deadline, but the real deadline for Congress to finish its business on this legislation is more likely to be Thursday, July 1, or Friday, July 2, because most members will be anxious to get back to their states and districts for Independence Day events. Between now and then, several things must happen. Assuming the conferees come to a conclusion and the majority agrees to a final package, the conference committee must produce two documents:

1. A conference report, which the majority of conferees must sign; and
2. A joint explanatory statement, which explains what the conference report does.

The House will then act first and take up the conference report. The House Rules Committee will have to meet to agree to a rule for the report’s floor consideration. House rules require that conference reports must layover 72 hours, however, the Rules Committee may vote to waive that rule. If not, that could add three extra days to the process.

Once the conference report goes to the House floor, the members can vote to adopt, reject, or recommit it (to the conference committee). Assuming the House adopts the conference report, it would then go to the Senate where it is subject to debate and possibly a filibuster. Even if Majority Leader Harry Reid (D-NV) has the 60 votes needed to invoke cloture and end the filibuster, there is a two day process for cloture plus 30 hours of post-cloture debate.

What this means is that process issues alone could take up a week’s worth of congressional time. House Financial Services Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Chris Dodd (D-CT) are seasoned legislators who have likely factored these procedural constraints into their strategy. Financial Reform Watch predicts the Chairmen will push hard to finish the conference committee work by the end of this week or weekend, leaving next week to get through the procedural hurdles. If they are unsuccessful in bringing the conference’s work to a close by next Monday, the July 4th deadline may be in real jeopardy.

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As the 43 House and Senate conferees today begin debating reforms related to insurance, credit rating agencies, the thrift charter, and private funds within the financial regulatory reform bill, House Financial Services Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT) announced further details of the conference committee agenda over the next couple of weeks.

Most notably, the two most contentious items of financial reform—the newly-created Consumer Financial Protection regulator and the enhanced oversight of derivatives—will be dealt with next week according to the schedule. The somewhat divisive resolution authority provisions (aimed at preventing “too-big-to-fail”) will be considered this Thursday. Below is the tentative schedule:

Week 1 (The week of June 14)

Wednesday, June 16

• Title 9, subtitles A, B, F, H, I and J of base text: Investor protection/regulatory improvements
• Title 9, subtitles E and G of base text: Executive compensation/corporate governance
• Title 11 of base text: Fed audit and governance, and emergency liquidity provisions

 Thursday, June 17

• Titles 1, 2 and 8: Systemic risk regulation, resolution authority, payments/clearing/settlement

Week 2 (The week of June 21)

• Consumer Protection Agency, CFPA/CFPB
• Predatory lending
• Interchange
• Remittances
• Access issues
• Prudential regulation
• Derivatives; miscellaneous

DOWNLOAD: HR 4173 - Conference Base Text (PDF)

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Aiming to deliver a financial regulatory reform bill to President Obama’s desk before the July 4th recess, this morning Senate Democratic leadership unveiled its list of members charged with reconciling the competing House and Senate versions of the Wall Street Reform and Consumer Protection Act of 2009.

The Senate's lineup of conferees includes seven Democrats and five Republicans, eight of which are members of the Banking Committee and four from the Agriculture Committee:

Banking, Housing and Urban Affairs Committee

• Chairman Christopher Dodd (D-CT)
• Ranking Member Richard Shelby (R-AL)
• Senator Tim Johnson (D-SD)
• Senator Jack Reed (D-RI)
• Senator Chuck Schumer (D-NY)
• Senator Bob Corker (R-TN)
• Senator Mike Crapo (R-ID)
• Senator Judd Gregg (R-NH)

Agriculture Committee

• Chairwoman Blanche Lincoln (D-AR)
• Ranking Member Saxby Chambliss (R-GA)
• Senator Patrick Leahy (D-VT)
• Senator Tom Harkin (D-IA)

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Without any votes to spare, the Senate this afternoon approved, by a tally of 60-40, a motion to limit debate on the Restoring American Financial Stability Act of 2010 (S.3217), effectively bringing the Senate’s debate over financial reform to its final stages. Senate Majority Leader Harry Reid (D-NV) says he is now aiming to complete the bill tonight following the consideration of a handful of remaining amendments.

After falling just short of garnering the necessary 60 votes to invoke cloture during yesterday’s session, Senate Democrats were able to pick-up the support of  Sen. Scott Brown (R-MA)—who joined GOP colleagues Olympia Snowe and Susan Collins of Maine as the only Republicans to support cloture—along with Sen. Arlen Specter (D-PA), who was absent during Wednesday’s session. For the second day in a row, Sens. Maria Cantwell (D-WA) and Russ Feingold (D-WI) voted in opposition. Brown appears to have switched his vote after receiving assurances from Democratic leadership that the bill’s proprietary trading ban would be modified in order to shield the insurance industry.

As a result of the successful cloture motion, only amendments deemed “germane” to the legislation will be eligible for consideration, ultimately nixing the possibility for consideration of most of the pending amendments. Amendments likely for consideration are a proposal offered by Sen. Sam Brownback (R-KS) to exempt automobile dealers from the regulatory purview of a newly-created Consumer Financial Protection Bureau (CFPB) and an amendment from Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) that would explicitly prohibit banks and bank holding companies from engaging in proprietary trading activities.

With the votes secured, we expect Democratic leadership to wrap things up either tonight or tomorrow morning.
 

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Falling short of the necessary 60 votes to cut off debate on the Restoring American Financial Stability Act of 2010 (S.3217), a motion to invoke cloture failed in the Senate this afternoon by a vote of 57-42.

Although Maine’s Republican Senators Olympia Snowe and Susan Collins decided to break rank with their GOP colleagues by supporting cloture, Senate Majority Leader Harry Reid (D-NV) was unable to keep his caucus in line, ultimately losing the votes of both Maria Cantwell (D-WA) and Russ Feingold (D-WI). In a parliamentary maneuver, Reid switched his vote in order to reconsider the cloture motion at a time that has yet to be determined.

Both Reid and Senate Banking Committee Chairman Christopher Dodd (D-CT) must now return to the negotiating table in order to establish a timeline for the consideration of additional amendments. Until then, the magic number of 60 remains elusive.

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Senate Majority Leader Harry Reid (D-NV) has teed up a critical vote today at 2 p.m. on the motion to invoke cloture, or limit debate, on the financial regulatory reform legislation, representing the first major step in wrapping up nearly a month of Senate debate.

If cloture is invoked—and Reid says he has commitments from Republican senators in order to garner the necessary 60 votes, despite the cries of a handful of Democrats who are seeking additional floor time for the consideration of their amendments—the Senate will likely vote on final passage of the Restoring American Financial Stability Act of 2010 (S.3217) on Friday.

Although the filing deadline for amendments has passed, Senate Banking Committee Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) continue to negotiate a resolution to the remaining amendments that have been offered by senators on both sides of the aisle. Reportedly, Dodd has now approved roughly 40 amendments that will be incorporated into a single manager’s amendment that will be offered this week.

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After wrapping up another eventful voting week that involved the consideration of nearly 15 amendments to the Restoring American Financial Stability Act of 2010 (S.3217), the Senate – and perhaps the Congress – now appears headed towards the finish line on financial regulatory reform.

Despite the numerous votes, Senate Banking Committee Chairman Christopher Dodd’s (D-CT) overhaul legislation escaped relatively unscathed from problematic amendments that could have disrupted future conference negotiations with the House, as a flurry of proposals – including those related to credit rating agencies, Fannie Mae and Freddie Mac, community banks, oversight of the Federal Reserve’s monetary policy, underwriting standards, the newly-created consumer financial protection bureau (CFPB) and interchange fees – all were brought up for consideration (see below for additional details on amendments). When the chamber returns to action next week, Senate Majority Leader Harry Reid (D-NV) is expected to set up a vote that will occur on Wednesday to invoke cloture – or limit further debate to 30 hours – which if approved, would likely lead to the bill’s final passage later in the week. Some sources around Capitol Hill are even predicting that after the Senate completes its work, House Financial Services Chairman Barney Frank (D-MA) and fellow Democrats will push for House passage of the Senate bill, precluding the need for a formal conference and ultimately shortening the timeline for the President’s signature.

But predictions aside, Dodd must still contend with the burgeoning frustration of his Democratic colleagues in the Senate, who expressed dismay this week that only 31 amendments out of the over 300 introduced have been formally debated on the floor thus far. In addition, particular contention still lingers with respect to the legislation’s provisions regulating derivatives transactions, specifically the scope of the bill’s "commercial end-user" exemption and its prohibition on commercial banks and bank holding companies from directly engaging in derivatives transactions. The Senate rejected, 39-59, a Republican derivatives proposal offered by Senators Saxby Chambliss (GA), Richard Shelby (AL), Judd Gregg (NH) that sought to limit the types of swaps transactions that would face clearing requirements by exempting “bona-fide hedging swap transactions.”
 

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Following a nearly three-day logjam, the Senate is now voting , and voting often, as leaders on both sides continue to queue up a broad array of amendments dealing with nearly every component of the Restoring American Financial Stability Act of 2010 (S. 3217).

Yesterday, the Senate jumpstarted the amendment process by passing overwhelmingly two proposals aimed at ending “Too Big To Fail” through modifications to the bill’s resolution authority language. The first amendment, offered by Senator Barbara Boxer (D-CA), attaches language specifying that “no taxpayer funds shall be used to prevent the liquidation of any financial company”; and the second amendment, offered by Senators Christopher Dodd (D-CT) and Richard Shelby (R-AL), removes the controversial $50 billion fund that would have been used to finance the resolution of failing financial institutions and would limit the payments received by creditors during liquidation. The Boxer amendment passed by a vote of 96-1 and the Dodd-Shelby amendment was approved 93-5.

Although both parties were able to resolve the “Too Big Too Fail” dilemma relatively peacefully through closed door negotiations, the gulf between Democrats and Republicans over a contentious proposal to create a new consumer financial protection bureau (CFPB) may prove to be more difficult. At some point today, the Senate is expected to consider an alternative GOP proposal offered by Shelby and Senate Minority Leader Mitch McConnell that would, as opposed to the current Dodd proposal that places the CFPB within the Federal Reserve, put the new bureau inside the FDIC and grant its board with significant oversight authority over the bureau's rulemaking decisions. The Shelby-McConnell proposal would also limit the bureau’s authority to that of rulemaking, as banking regulators would retain their enforcement and supervisory authority. But nonetheless, the GOP alternative’s prospects of passage are dismal by most accounts.

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Fresh off a newly-brokered compromise between Senate Banking Committee Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL), Senate leaders announced this evening that both sides have unanimously agreed to begin debating the Restoring American Financial Stability Act of 2010 (S.3217) – officially putting an end to nearly three days of legislative stalemate.

Although details of the Dodd-Shelby compromise language – which reportedly only changes provisions related to eliminating taxpayer bailouts of large and interconnected financial institutions -- have yet to be unveiled, a senior GOP aide said it amounted to “huge concessions” by the Democrats, and ultimately led to the Republicans' final decision to move debate on the broader legislation forward. The Senate made progress tonight in spite of the fact that two other major areas of contention -- derivative regulation and the powers of a newly-created Consumer Financial Protection Bureau (CFPB) -- remain unresolved.

Beginning on Thursday, the amendment process will kickoff with the consideration of a Dodd-Lincoln substitute amendment.  Particular attention will be paid to the derivative language, especially whether or not a broader exemption should be provided for "end-users " and also whether or not banks will be forced to spin-off or “wall off” their swaps operations -- a proposal that is currently opposed by Republicans, the Federal Reserve, a few Democrats (including New York Senator Kirsten Gillibrand and Virginia's Mark Warner), and even some in the Obama Treasury Department.

Both Republicans and Democrats are expected to introduce a laundry list of amendments in what Senate Democratic leadership pledges will be an open process.
 

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Tonight the Senate Democratic leadership was unable to get the 60 votes necessary to advance comprehensive financial regulatory reform legislation (S. 3217). The motion to proceed to the bill failed by a vote of 57-41. Sen. Ben Nelson (D-NE) was the lone Democrat to vote with the united Republicans. Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Minority Member Richard Shelby (R-AL) continue to work behind the scenes toward a compromise package that could attract more than 60 votes. At the same time, Senate Republicans are rumored to be drafting a Republican alternative to the Banking Committee-passed bill. Senate Majority Leader Harry Reid (D-NV) can move to reconsider tonight's vote -- i.e. a do-over -- at any time, but he is not likely to do that until he has secured at least 60 votes.
 

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Today the Senate Agriculture Committee, led by Chairman Blanche Lincoln (D-AR), completed its work on the over-the-counter derivatives section of financial regulatory reform. By a vote of 13 to 8, the committee adopted the Wall Street Transparency and Accountability Act. Sen. Charles Grassley (R-IA) was the only Republican to join the committee Democrats in voting for the bill.

The Senate is set to vote to end the filibuster on the Senate Banking Committee bill next Monday evening, which would allow Banking Chairman Chris Dodd (D-CT) to bring the legislation to the floor next Tuesday, April 27. The Monday night vote is dependent on getting at least one Republican to break ranks and vote for cloture, which would end the delay. No one knows which Republican will cave, but some likely candidates are the moderate Senators from the Northeast: Olympia Snowe (R-ME), Susan Collins (R-ME), or Scott Brown (R-MA).

We expect Sen. Dodd to incorporate Lincoln’s Wall Street Transparency and Accountability Act into the financial reform package he brings to the floor. Following are a few shorthand highlights of the Lincoln bill, but click here for the Senate Agriculture Committee’s more extensive summary and the most up to date bill language.

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Following financial regulatory reform's path in the Senate may require a scorecard. This coming Monday, Senate Banking Committee Chairman Chris Dodd (D-CT) plans to file his committee's report on the legislation it adopted before the spring recess. Sen. Majority Leader Harry Reid (D-NV) announced that the Senate will begin floor debate on the bill starting next week. Meanwhile, Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) today unveiled her much anticipated derivatives bill, which her committee will markup next week. Reportedly, the current Lincoln bill does not reflect the negotiations she has been having with her Republican counterparts, and the legislation is likely to change significantly during next week's markup. Of course, the Agriculture Committee markup could end up like the Banking Committee markup with no amendments and a party line vote. It is too early to predict, but President Obama's threat today -- that he would "veto legislation that does not bring the derivatives market under control" -- signals that the White House is not looking to compromise.

Earlier today, it looked like Democrats would have been able to entice at least one Republican to help them break a possible filibuster next week. By this afternoon though, all 41 Republican Senators sent a unified letter to Reid opposing the Banking Committee bill and asking for support for the bipartisan negotiations several Senators have continued conducting.

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This afternoon at 5 p.m. the Senate Banking Committee will meet and likely adopt along party lines Chairman Chris Dodd's "Manager's Amendment" to his financial regulatory reform draft unveiled earlier this month. Instead of dedicating a week or more to consideration of the 473 amendments filed by committee members -- 98 of which were filed by Sen. Bob Corker (R-TN) -- Dodd decided to incorporate a fraction of the amendments into one roughly 100-page package and then move the bill swiftly and successfully out of committee.

Corker said this morning that he was disappointed about the process, since he had hoped to work through many of the issues in a bipartisan fashion within the Banking Committee.  Assuming things go as predicted tonight, many compromises to the bill will be worked out behind the scenes prior to floor consideration, while still other issues will play out on the Senate floor.

Corker still believes the bill has a 90 percent chance of passing ultimately and thinks that there may be a "better opportunity with a different cast of characters -- the full Senate -- to do something policywise."
 

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

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Heading into the House Financial Services Committee's markup of the CFPA bill last week, a handful of moderate, pro-business Democrats—including Reps. Melissa Bean (IL) and Jim Himes (CT)—banded together with the intention of significantly watering down bill language that scraps long-standing federal preemption laws related to consumer protection. However, merely a week later, and in the midst of suggestions from Democratic colleagues that a reinstitution of federal preemption laws would hamper the rulemaking ability of the states and ultimately poison the overarching bill, Bean and her allies were only able to muster a few drops as the committee approved legislation this morning by a vote of 39-29.

Instead, by voice vote, the committee agreed yesterday to an amendment to the Consumer Financial Protection Agency Act of 2009 (H.R. 3126) that allows the Office of the Comptroller of the Currency (OCC) or the Office of Thrift Supervision to intervene and preempt state laws on a limited basis, only in cases where state law discriminates against nationally chartered institutions or “significantly interferes with” national banks’ ability to engage in banking. Offered by Reps. Mel Watt (D-NC) and Dennis Moore (D-KS), the amendment still leaves in place bill language that severely limits the exemptions from state laws that nationally chartered thrifts, banks, and their operating subsidiaries have enjoyed since 2004. 

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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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Your Financial Reform Watch team has reported before on key legislators' misgivings with the administration's plan to make the Fed the systemic risk regulator for so-called "Tier 1" financial holding companies. Those misgivings are holding sway now on Capitol Hill and are beginning to take hold in the administration itself.

Just yesterday, SEC Chairman Mary Shapiro and FDIC Chairman Sheila Bair were the latest to endorse what Shapiro referred to as a “hybrid approach,” one that would significantly strengthen the president’s current proposal of creating a Financial Services Oversight Council, responsible for collecting data and identifying emerging financial market risks for the Fed. Instead, both Shapiro and Bair envision a council of regulators that would work in concert with the central bank. Additionally, Bair recommended that, in order to ensure independence, the chairman of the council should be a presidential appointee subject to Senate confirmation.

On the Senate side, Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) are both giving voice to concerns about the enhanced role for the Fed. Shelby has been an outspoken critic of giving the Fed such authority from the start, but Dodd’s statements at a committee hearing yesterday that the “new authority could compromise the independence of the Fed when it provides monetary policy,” and that he “expect[s] changes to be made to this proposal," made it clear the Senate is heading in a direction different from the administration's.

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Late yesterday afternoon, the Treasury Department released draft legislation that would require advisers to hedge funds, private equity funds, venture capital funds, and other private pools of capital to register with the Securities and Exchange Commission (SEC) if they have more than $30 million of assets under management. In addition to registering, the advisers will be subjected to new reporting, recordkeeping, compliance, and disclosure requirements as well as conflict of interest and anti-fraud prohibitions. In its release, Treasury said,

"The Administration's legislation would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to our overall financial stability."

Financial Reform Watch will be tracking this legislation as it moves through Congress.

Treasury:  Proposed Legislatve Language for the Registration of Hedge Funds (PDF) 

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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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The Treasury Department today released draft legislation outlining a central pillar of the Obama administration’s financial regulatory overhaul: the creation of the Consumer Financial Protection Agency (CFPA), an independent regulator with broad authority over “any financial product or service” used by consumers. Seeking to clarify the administration’s June 17th white paper on financial regulatory reform, the legislation provides lawmakers and industry leaders with the statutory details regarding the proposed CFPA.

According to the draft language, in order to continuously monitor consumer risks, the agency—composed of a five-member board led by a presidentially-appointed director subject to Senate confirmation—would collect information related to loans, products, and services from both banks and non-banks. Additionally, consumer financial regulations that are currently divided among several agencies—the Federal Reserve, FDIC, Office of Comptroller of the Currency, Office of Thrift Supervision, Federal Trade Commission, and National Credit Union Administration—will be consolidated within the CFPA. The legislation would have these regulators transfer functions, rules, and employees to the new CFPA within six to eighteen months following enactment. The agency must research, analyze, and report on consumer awareness and understanding of financial products, related disclosure statements, related risks and benefits, and consumer behavior related to such products. The agency would also collect and track consumer complaints and create a new, integrated disclosure form for mortgage transactions, unless the Department of Housing and Urban Development and the Fed can achieve the same goal prior to the transfer of such responsibilities to the CFPA. There are also provisions related to civil penalties and enforcement authority.

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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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Ever since the AIG bonus brouhaha, TARP recipients knew the day would come when federal officials would step in to manage their compensation structure. Several have been scrambling to raise the private capital necessary to repay their TARP loans just to avoid the anticipated executive compensation restrictions. There are reports today that Treasury Secretary Geithner may announce new guidelines as early as this week. However, he is not currently scheduled to appear on Capitol Hill on this topic until the House Financial Services Committee hearing on June 18th. Whenever he makes his announcement, we expect he will explain that the new executive compensation rules will apply to some TARP recipients permanently – those that accepted more than one round of bailout money -- regardless of whether or not they have paid back the federal funds. In addition, it is also reported that Treasury will be suggesting "guidelines" to be used for executive compensation in financial services firms that have not receive TARP assistance.

It appears the restrictions will be imposed on a company’s 25 highest earners. Reportedly, federal bank regulators will also be granted new authority to impose compensation restrictions on banks not in the TARP program whose pay systems encourage too much risk. How much risk is too much and who determines that remain important questions.

The expected move to extend the pay restrictions beyond the life of the TARP involvement in the firms raises some important questions. Are restrictions that outlive TARP money in the firms consistent with the agreements the institutions made originally with the government? Will there be any sunset whatsoever on the proposed restrictions? Where GM is concerned, will the company emerging from bankruptcy be considered a "new" company?

To the extent the new guidelines would reach into companies who have not received TARP funds, it is legitimate to ask the question as to whether these are a legitimate shareholder's rights issues or an overreach by federal regulators into areas best left to the executive suite and the boardroon.

Since there are very few facts available and only rumors, Financial Reform Watch will reserve judgment until the Treasury releases the new rules, however, there is much to ponder in the meantime.

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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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The EC Commission on Wednesday proposed new binding legislation on “Alternative Investment Fund Managers” (AIFM), which includes the managers of hedge funds and private equity funds. This is, according to the Commission, the first attempt in any jurisdiction to create a comprehensive framework for the direct regulation and supervision in the alternative fund industry. The proposal now passes to the European Parliament and Council for consideration.

 The proposed AIFM Directive would:

• Adopt an 'all encompassing' approach so as to ensure that no significant AIFM escapes effective regulation and oversight. The Directive will only apply to those AIFM managing a portfolio of more than 100 million euros. A higher threshold of 500 million euros applies to AIFM not using leverage (and having a five year lock-in period for their investors) as they are not regarded as posing systemic risks. A threshold of 100 million euros implies that roughly 30 percent of hedge fund managers, managing almost 90 percent of EU-domiciled hedge fund assets, would be covered by the Directive.
• Regulate all major sources of risks in the alternative investment value chain by ensuring that AIFM are authorized and subject to ongoing regulation and that key service providers, including depositaries and administrators, are subject to robust regulatory standards.
• Enhance the transparency of AIFM and the funds they manage for supervisors, investors, and other key stakeholders.
• Ensure that all regulated entities are subject to appropriate governance standards and have robust systems in place for the management of risks, liquidity, and conflicts of interest.
• Permit AIFM to market funds to professional investors throughout the EU subject to compliance with demanding regulatory standards.
• Grant access to the European market to third country funds after a transitional period of three years. This should allow the EU to determine whether the necessary guarantees are in place in the countries where the funds are domiciled (e.g. the equivalence of regulatory and supervisory standards and the exchange of information on tax matters).

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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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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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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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On both sides of the Atlantic, the looming deadline for the G20 Summit in London on 2 April is driving policymakers to come up with recommendations for global financial reform. The presentation of the de Larosiere “high level group,” which the EU commissioned and is headed by former French central banker Jacques de Larosiere, is now only a couple of days away from presenting its proposals for financial reform legislation. Expectations are that the proposals will be far-reaching. Observers regard the G20 meeting in Berlin over the weekend as part of the build-up of support for the proposals that many still may regard as controversial. The EU’s objective remains to create support for the proposals ahead of the G20 meeting.

At the meeting in Berlin, participants focused on the importance of transparency and accountability on the part of all financial market participants by affirming their conviction that all financial markets, products, and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile. They agreed this is especially true for those private pools of capital, including hedge funds, that may present a systemic risk. The meeting therefore called for appropriate oversight or regulation of these sectors in order to prevent excessive risk-taking and also agreed that credit rating agencies should be subject to mandatory registration and oversight.

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Who appointed the G7 (+1) to its perch? The finance ministers for the main protagonists in World War II (1939-1945) met in Rome over the weekend to discuss the world economic crisis. Does a meeting of this nature that excludes India and China truly have a hope of wrapping its collective mind around the problems and their possible solutions?

Is ideology standing in the way of the most elegant solution to the U.S. banking crisis? Give former President George W. Bush his due: when the dimensions of the banking crisis became apparent to him, he scrapped a "market guy" ideology and poured taxpayer money into the banks. Is the Obama Administration willing to take what for them would be a similar ideological leap? Is their unwillingness to do so behind the complex public-private partnership at the center of the Geithner proposal to deal with troubled assets? Is there a similar reason behind the relatively light-handed approach Geithner would take to pushing the banks to resume lending?

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Next week President Obama and Treasury Secretary Geithner will unveil the administration’s broad financial reform agenda—a strategy to get credit moving again—but yesterday offered a preview as they unveiled new restrictions on executive compensation. The announcement was in direct response to public outrage over the use of taxpayer funds to subsidize “excessive compensation packages on Wall Street.” The president railed against “lavish bonuses” and a “culture of narrow self-interest and short-term gain at the expense of everything else.” It will be interesting to see if this policy, which could affect compensation policies at industry-leading institutions, will result in a reduction and/or restructuring of executive compensation throughout the financial services industry. Even though the new policy appears intended to have just such a leavening effect on compensation, President Obama tried to reassure free-marketers by saying: “This is America. We don’t disparage wealth…and we believe success should be rewarded.”  But he went on to say that executives being rewarded for failure, especially with taxpayer money, is wrong.

The Treasury executive compensation reform guidelines fall into three categories covering:

• all TARP recipients;
• participants in a “generally available capital access program,” such as the Capital Purchase Program; and
• institutions that receive “exceptional assistance,” such as Citigroup, Bank of America, and AIG. 

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The flow of substantive input regarding the global financial architecture continues. While the recommended actions differ, most commentators concur that action is urgent and reform should be sweeping.

On 15 January, the Group of 30, chaired by Paul A. Volcker and comprised of leading policy-makers and business leaders from across the globe, issued the Framework for Financial Stability—a set of 18 recommendations for financial reform, including that:

• “In all countries, the activities of government-insured deposit-taking institutions should be subject to prudential regulation and supervision by a single regulator (that is, consolidated supervision).”
• “Gaps and weaknesses in the coverage of prudential regulation and supervision must be eliminated. All systemically significant financial institutions, regardless of type, must be subject to an appropriate degree of prudential oversight.”
• “In general, government-insured deposit-taking institutions should not be owned and controlled by unregulated non-financial organizations, and strict limits should be imposed on dealings among such banking institutions and partial non-bank owners.”

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In the past days, more leading stakeholders have added their voices to the chorus arguing for a strategic re-design of global financial markets regulation.

On 9 January, the President of the European Central Bank, Jean-Claude Trichet, spoke at a conference organized by the French Government, which also featured President Nicholas Sarkozy, German Chancellor Angela Merkel, and former British Prime Minister Tony Blair among its speakers. Trichet, speaking on the topic of “A Paradigm Change for the Global Financial System,” provided a scathing assessment of the failures of the financial system, not too dissimilar to that of Willem Buiter. Trichet remarked:

“The current crisis stands out because it is affecting the heart of the global financial system. Its root cause was a widespread undervaluation of risk in the global financial system, especially in the most advanced economies. This included an underestimation of the quantity of risk financial institutions took upon themselves and an under-pricing of the unit of risk. Risk was under-priced because, among other things, financial market participants largely extrapolated ongoing trends and the very low levels of volatility in financial markets and in the real economies going forward. “

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In spite of the holidays and new year celebrations, financial sector events have continued to unfold unremittingly, forcing EU policy makers to consider policy readjustments, yet again.

The scandal surrounding Bernard L. Madoff Investment Securities LLC, the financial implications of which are global and yet to be fully discovered, is one of the most recent examples. No doubt, Madoff will give those supporting new financial regulation and oversight the upper hand in reform discussions just as Enron provided carte blanche for those promoting the Sarbanes-Oxley legislation, and its EU siblings, a few years ago.

One of the calls for new, drastic, financial reform—more difficult to argue against in a post-Madoff environment—comes from the distinguished Financial Times columnist Willem Buiter. In a recent speech, Buiter provided a damning analysis of the shortcomings of the financial system and also provided his recommendations for the appropriate policy responses. It would have been less surprising if these radical proposals had emanated from outraged elected officials, rather than from a professor of political economy at the London School of Economics.
 

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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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