Financial Reform Bill: It’s a Whopper

(Part 1 of 2)

A sweeping financial reform package passed the U.S. Senate last week. With a version already passed in the House, now compromises must be worked out by a conference committee to be led by Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D- Mass.).  The indication is they would like to send a final bill to President Obama by July 4.

However, there remain significant points of contention to be negotiated between the House and Senate; perhaps most notably the Senate provisions forwarded by Sen. Blanche Lincoln (D-Ark.) that require banks to spin off their derivative trading to affiliate entities. Over the next few weeks, advocates will continue to promote their position on the several items at play and the final product is still in question.

Below are descriptions of the major components in the Senate bill (see the 1,300-plus page bill in its entirety):

  • New Regulatory Authority – Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm’s collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Management could be removed, with shareholders and unsecured creditors bearing losses. Other provisions would make it harder for top executives at the failed firms to claim large compensation packages, and it would give the government power to limit payments for certain creditors of failed firms. The Treasury would supply funds to cover the upfront costs of winding down the failed firm.
  • Consumer Agency – Creates a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses, large non-bank financial companies such as big payday lenders and consumer reporting companies, and for banks and credit unions with assets of more than $10 billion.
  • Derivatives – Requires the vast majority of all derivatives trading be executed on a public exchange as opposed to between banks and their customers as many contracts are currently. Most controversially, the bill would adopt language written by Sen. Lincoln that would compel any large commercial banks that have access to the Federal Reserve’s discount window to spin off their derivatives trading business. The Fed, FDIC andTreasury, as well as the banking industry, have argued against this measure.
  • Financial Stability Council – Establishes a new, nine-member Financial Stability Oversight Council, comprised of existing regulators, charged with monitoring and addressing system-wide risks to the nation’s financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, would have the power to break up financial firms.
  • Oversight Changes – Eliminates the Office of Thrift Supervision, but an attempt to strip the Fed of its oversight of thousands of community banks was reversed with an amendment. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
  • Federal Reserve Oversight – Calls for a one-time government audit of all of the Fed’s emergency lending programs from December 2007 onward, including facilities used to help deal with the collapse of Bear Stearns & Co. and the program to stabilize asset-backed securities markets. The Government Accountability Office would also review the Fed’s corporate governance, including whether there are conflicts of interest inherent in the current design of the Federal Reserve System.

Summary of remaining key components to be posted later today.

Specter to Become a Spectator?

While Congressional races in Indiana drew attention two weeks ago, a brighter national spotlight is shining on Senate primary votes Tuesday in Pennsylvania, Arkansas and Kentucky. Part of the intrigue is whether a couple of Democratic incumbents will become lame ducks.

The focus is on senators Blanche Lincoln of Arkansas (challenged by Lt. Gov. Bill Halter) and Arlen Specter of Pennsylvania (facing Rep. Joe Sestak).

Runoffs are possible for both parties in Arkansas as a third candidate could keep Lincoln or Halter from getting 50% of the vote. On the Republican side, Rep. John Boozman is the favorite but there are eight other candidates on the ballot and he was polling below the 50% mark.

Those polls place Boozman ahead of both Democrats in general election matchups, but Lincoln has a huge advantage in cash on hand.

Specter’s much-publicized departure from the GOP came, at least in part, because he believed he wouldn’t win a primary battle against former Rep. Pat Toomey. Now he is in a close battle against Sestak, who has successfully used the message that he is the real Democrat in the race. The two Democrats and Toomey also have substanial bankrolls for the fall.

Kentucky features a pair of close battles. Ophthalmologist Rand Paul, a Tea Party favorite, is leading Republican establisment favorite Trey Grayson (current secretary of state). On the Democrat side, two current top state officials — Attorney General Jack Conway and Lt. Gov. Daniel Mongiardo, are in a dead heat.

Two incumbent primary victims thus far have been Sen. Bob. Bennett (R-Utah) and Rep. Alan Mollohan (D-West Virginia). I’ll take a guess that Specter might just joing them. Either way, Tuesday will be another lesson about the anti-incumbent mood among voters.

Rallying Cry: Stop the EPA

We reported last week on the efforts of several states (Texas being the latest to file suit) to stop Environmental Protection Agency regulation of greenhouse gases. The reasons are many, including devastating impacts on the economy.

Add a few more powerful players to the mix — Mississippi Gov. Haley Barbour and a leading Senate committee member. Both want to employ the Congressional Review Act. Here is an explanation:

Barbour is floating a draft letter to governors at their winter meeting asking Congress to use the Congressional Review Act to reject EPA’s endangerment finding. That finding cites climate change as a risk to public health and welfare, which the agency is using as justification for pursuing regulations.

"In addition to placing heavy administrative burdens on state environmental quality agencies, regulating greenhouse gases through the Clean Air Act will be costly to consumers and hurt the U.S. economy, resulting in job losses," according to Barbour’s draft.

This echoes an effort by Senate Energy and Natural Resources ranking member Lisa Murkowski, who is expected to call for a vote on a resolution in March to use the Congressional Review Act to block EPA, spokesman Robert Dillon said.

She needs 51 votes and has 40 co-sponsors for her disapproval resolution, including three Democrats led by Senate Agriculture Chairwoman Blanche Lincoln.

Murkowski’s effort, and those by Energy and Commerce ranking member Joe Barton and others in the House, are not expected to be successful, given Democratic control of Congress and opposition from the president, who could veto a resolution even if it gets through both chambers.

But it continues to raise the argument that efforts by the Obama administration and Democratic congressional leaders to limit U.S. greenhouse gases are serious threats to the economy heading into this fall’s elections.