Next Up in Harry Reid's Playbook: Go Long

In the eyes of Senate Democratic Leadership, the writing is on the wall. A recent poll shows that nearly two-thirds of Americans support reforms to the financial industry and a majority of those voters trust President Obama over Republicans in getting the job done. And now, following a series of tactical maneuvers this week that forced Senate Republicans into voting not once, twice, but three times against moving forward with the debate on financial regulatory reform, Senate Majority Leader Harry Reid’s (D-NV) next play appears simple: ride the populist wave against Wall Street all the way to November.

Beginning next week, the Senate will begin formally debating and considering amendments to the Restoring American Financial Stability Act of 2010 (S.3217)—a process likely to consume at least two weeks of floor time. Reid’s announced timeline of Memorial Day for completion of S.3217, coupled with President Obama’s new goal of September for the signing of a final bill, provide a clear indication that Democrats are looking to financial reform as a signature issue in the 2010 elections.

Pushing the debate forward was an agreement brokered this week between Senate Banking Committee Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) that removes a controversial $50 billion “Orderly Liquidation Fund” that GOP members argued would prompt future taxpayer bailouts. In addition, Republicans say they have received assurances from both Reid and Dodd that their amendments will receive sufficient consideration under an open amendment process—although both parties are still negotiating the ground rules for debate, and are mulling a 60-vote threshold for adoption of amendments.

Below is a list of amendments that have already been introduced or are expected to be introduced by early next week:

Too Big To Fail

  • Sen. Barbara Boxer (D-CA) – Seeks to neutralize GOP efforts to portray the bill as perpetuating the concept of “too big to fail” by specifying that “no taxpayer funds shall be used to prevent the liquidation of any financial company.”
  • Sens. Sherrod Brown (D-OH) and Ted Kaufman (D-DE) – Prohibits U.S. banks from holding more than 10 percent of the nation’s total deposits; puts in place a leverage cap of six percent of total consolidated assets; and limits a bank’s liabilities — other than deposits — at two percent of national gross domestic product (GDP).

Bank Regulation

  • Sens. John McCain (R-AZ) and Maria Cantwell (D-WA) - Reinstates the Glass Steagall Act, which would prohibit the merging of commercial and investment banking.
  • Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) – Explicitly prohibits banks from engaging in “proprietary trading” activities — also known as the “Volcker Rule.” This amendment goes further than the current Dodd bill, which merely directs federal regulators to study whether or not such restrictions should be implemented.

Consumer Protection

  • Sen. Jack Reed (D-RI) - Establishes a freestanding Consumer Financial Protection Agency. The Dodd bill currently includes the creation of a Consumer Financial Protection Bureau (CFPB) as an independent division of the Federal Reserve.
  • Sen. Sam Brownback (R-KA) – Exempts automobile dealers from regulations promulgated by the newly-created CFPB.
  • Sen. Kay Hagan (D-NC) - Prohibits payday lenders from making more than six loans to the same borrower in a 12-month period; and would grant borrowers additional time to repay such loans.

Amendments are expected to multiply in the days ahead as both Democrats and Republicans will seek to put their stamp on nearly every component of the 1,400-page legislation, with particular focus likely to be placed on the regulation of derivatives, along with the size and scope of the new consumer agency. In addition, Dodd is planning to spend the weekend discussing further changes to the bill that will likely be incorporated into a broader “manager’s amendment.”

It's Complicated

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.

The buzz is that the White House will continue to insist on including the CFPA in any financial regulatory reform package. However, the new math of the Senate allows for Republicans to block initiatives where the party is uniformly opposed, which appears to be the case with the CFPA.

So the question may become, "Do Democrats want a bill or do they want a fight?" While Dodd appears to want a bill—and another legislative feather in his cap before retiring at the end of the 111th Congress—the Obama Administration, by many accounts, may prefer to have a fight. Many jumped to this conclusion last week when the administration announced plans to limit the size and investment activities of commercial banks and bank holding companies, representing a significant departure from their original policy stance of mitigating banking risk through higher capital standards.

A battle would be okay by Republicans too, since they would see that as an opportunity to block passage of an unreasonable bill and push the debate into the 112th Congress when they are likely to have better numbers and could have more influence over the legislation.

With that backdrop, Democrats and Republicans on the Senate Banking Committee are currently working to develop a financial regulatory reform package that can garner the support of most of its members. The outcome of those negotiations—and the level of bipartisan support—will determine how soon the legislation will be marked-up in committee, and when (or even whether) the bill will be considered by the full Senate later this spring.

There are a lot of moving parts—both politically and substantively. As noted earlier, “It's complicated.”

Dodd Retiring

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.

Divide, Conquer, and Reassemble

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.

Preemption in Consumer Financial Protection Agency (CFPA) Bill--More to Come

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. 

For the past several weeks, Bean had been championing an opposing amendment that would have preserved federal preemption for nationally chartered financial institutions. However, pressure from the White House and progressive members of the Democratic Caucus convinced Bean and her moderate “New Democrat” coalition to stand down at this juncture. Committee Chairman Barney Frank (D-MA) and others have said the preemption issue can be revisited when the bill goes to the full House for a vote. Jumping at the opportunity to expose fissures amongst Democrats on the committee, Rep. Jeb Hensarling (R-TX) introduced a nearly identical amendment to Bean’s, but was defeated by a vote of 29 to 38. Since Bean was not present at the markup due to a family illness, she did not have to participate in the potentially awkward vote.

The large national banks lost a lot of ground during the House markup. Financial Reform Watch anticipates they will redouble their efforts in the Senate, since it is unlikely that Bean will go against the party leadership and push her preemption amendment any further. One advantage the big banks have is time. The amount of time health care reform will demand on the Senate floor and the difficulties in finding bipartisan consensus at the Senate Banking Committee are likely to cause further delay in getting a comprehensive package before the full Senate.

Timing Is Everything

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.

Can New Dems Deliver Preemption?

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.

Leading the charge for federal preemption are third-term Congresswoman Melissa Bean (D-IL) who currently serves as Vice-Chair of the business friendly New Democrat Coalition and Rep. Jim Himes (D-CT), a freshman and former investment banker. Bean and Himes co-chair the New Democrats’ Financial Services Task Force and are in the process of drafting an amendment to Frank’s bill that would shield federally chartered banks from certain state consumer protection regulations. Despite their overall support for the CFPA, Bean said they want to ensure regulatory consistency through the CFPA's national standards.

Although Frank is dismissive of concerns that federal preemption is necessary to avoid market disruptions, Edward L. Yingling, President and CEO of the American Bankers Association (ABA), warned at the hearing that Frank’s current draft legislation would create a “patchwork of state, and even local, laws that will confuse consumers.” About a third of the majority side of the Financial Services Committee are New Democrats so Bean and Himes have some leverage, especially if committee Republicans side with them. Some of our FR Watch sources predict that Frank will concede on this, and a majority of the committee members will ultimately vote for the preemption amendment.

Financial Reform Marches Down Field--Fed Protects Its Turf

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. 

Although the first announcement had been long expected—Fed Governor Elizabeth Dukes had earlier testified to the House Financial Services Committee of plans for permanent oversight following a successful joint pilot project that reviewed consumer protection compliance of non-depository institutions engaged in subprime lending—the executive compensation proposal caught many in the financial industry off-guard, going far beyond the expected restrictions on only the highest bank earners.

Next week, the House of Representatives is slated to initiate the drafting process for financial reform legislation, beginning with several hearings related to a systemic risk regulator and the CFPA tentatively scheduled all the way through October. House Financial Services Chairman Barney Frank (D-MA) continues to insist that December is the new October, in reference to his original deadline for completing a reform package; and the deadline may be pushed back even further—potentially 2010—due to this week’s regulator activity.

The timing of the Fed’s moves have sent a clear message to lawmakers that it has no intention of quietly ceding its regulatory powers, especially those related to consumer protection. However, the central bank’s inability to prevent many of the missteps and misdeeds that led to the financial crisis has led to a crisis in confidence on Capitol Hill. Additionally, President Obama, Senate Banking Chairman Christopher Dodd (D-CT), House Financial Services Chairman Frank (D-MA), TARP Congressional Oversight Panel Chairman Elizabeth Warren, and FDIC Chairman Sheila Bair are all on record favoring the CFPA. Despite the strength of the offense, there is still disagreement coming from Republicans and some Democrats. Financial Reform Watch anticipates more "delay of game" setbacks in the coming months.

Below is the full list of HFSC hearings that were announced on Tuesday:


September 23, 9:30 a.m.     Testimony from Treasury Secretary Geithner

September 24, 10 a.m.        Expert’s Perspectives on Systemic Risk and Resolution Issues

September 25, 9 a.m.          Oversight and Audit Issues at the Federal Reserve System

September 30, 10 a.m.        Consumer Financial Protection Agency

September 30, 2 p.m.          Credit Rating Agencies (Capital Markets Subcommittee Hearing)


October 1, 10 a.m.                Financial regulators

October 2, 10 a.m.               Capital Market Issues

October 6, 10 a.m.               Capital Market Issues

October 7, 10 a.m.               Derivatives

October 8, 10 a.m.               Systemic/Prudential Banking Reform Issues

October 9, 10 a.m.              Systemic/Prudential Banking Reform Issues

House Democrats Offer Scaled-back Consumer Financial Protection Agency Proposal

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.”

Over the next month, the CFPA proposal is all but assured to consume the schedule of the House Financial Services committee, as Chairman Frank has stated his intentions of marking up H.R. 3126 by the end of July. However, serving as a harbinger for the difficulties that may lay ahead on Capitol Hill, a handful of Democrats on the House Energy and Commerce committee, including former Chairman John Dingell (D-MI), expressed serious concerns yesterday regarding the efficacy of stripping the Federal Trade Commission (FTC) of its oversight authority over non-bank financial institutions, such as mortgage brokers and finance companies, and transferring such functions to the CFPA. During a subcommittee hearing entitled "The Proposed Consumer Financial Protection Agency: Implications for Consumers and FTC,” Dingell also highlighted the sensitive committee jurisdictional issues that will arise by narrowing the mission of the FTC, which will ultimately narrow the jurisdiction of the House Energy and Commerce Committee.

Testifying on behalf of the Treasury, Assistant Secretary Michael Barr reiterated to lawmakers that proper oversight requires “one agency for one marketplace with one mission.”

“The lack of federal supervision of non-bank providers is an open invitation to the less responsible actors that seek darker corners to ply their dubious practices,” said Barr in his opening testimony. “These actors are willing to gamble that the FTC and state agencies lack the resources to detect and investigate them. This puts enormous pressure on banks, thrifts, and credit unions to lower their standards to compete—and on their regulators to let them.”

The Draft Consumer Financial Protection Agency Act of 2009

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.

The release of the legislative draft  of the Consumer Financial Protection Agency Act of 2009 was welcomed by House Financial Services Committee Chairman Barney Frank (D-MA), who said creating the agency was one of the committee’s highest priorities. Leaving wiggle room for the inevitable changes he and his colleagues will make, Frank added,

“While the committee will, of course, exercise its own judgment on the specifics and we have already had a thorough hearing on the matter, it is helpful to have the administration’s proposals as well because I believe there is a great deal of common ground between us. And with their text in hand we can now proceed to draft and approve a bill in committee before the August recess.”

Frank’s Senate counterpart, Banking Committee Chairman Chris Dodd (D-CT), also praised the administration and said the CFPA is “key to creating the foundations for a stronger economy.”

The draft legislation reaches into and amends several existing statutes including:

  • Consumer Leasing Act of 1976
  • Electronic Funds Transfer Act
  • Equal Credit Opportunity Act
  • Expedited Funds Availability Act
  • Fair Credit Billing Act
  • Fair and Accurate Credit Transactions Act
  • Federal Deposit Insurance Act
  • Federal Reserve Act
  • Federal Credit Union Act
  • International Banking Act of 1978
  • Fair Debt Collection Practices Act
  • Gramm-Leach-Bliley Act
  • Home Mortgage Disclosure Act
  • Home Ownership and Equity Protection Act of 1994
  • Real Estate Settlement Procedures Act
  • Truth in Lending Act; Right to Financial Privacy Act of 1974
  • Secure and Fair Enforcement for Mortgage Licensing Act of 2008
  • Farm Credit Act
  • Truth in Savings Act 

Consumer Financial Protection Agency Act of 2009 - White House Draft Bill (PDF)