U.S. Senator Christopher DoddChip Somodevilla
Democrats in the U.S. Senate are daring Wall Street to fight the most sweeping overhaul of financial regulation since the Great Depression, pushing ahead with divisive plans for a dedicated consumer watchdog, measures to make banks pay for their own bailouts, and new curbs on risky trading.
With the backing of the White House, Senate banking committee chairman Christopher Dodd unveiled a 1,200-plus-page bill Monday that aims to plug the regulatory gaps exposed by the housing meltdown and financial crisis of 2008.
The legislation covers everything from derivatives and executive pay to new rules for unwinding banks that threaten the financial system.
The bill, which marks the Democrat's second bid to pass reforms, comes after months of haggling with Republicans and intense behind-the-scenes lobbying by the banking industry.
Several key reforms have been watered down or abandoned altogether.
But the plan still represents a sea change from the regime that existed before crisis.
"The bill would represent a major improvement to the status quo, but political compromises significantly diminish its effectiveness compared to an ideal set of reforms," remarked Douglas Elliott, a former investment banker and now a senior fellow at the Brookings Institution think tank in Washington.
Gone, for example, is a plan to strip the U.S. Federal Reserve of most bank regulation functions.
And the newly created Consumer Financial Protection Bureau, which would regulate mortgage and credit card practices, would be housed within the Fed, rather than being fully independent.
The new bill does include a version of the controversial Volcker rule, named after former Fed chief Paul Volcker, now an adviser to the Obama administration.
The legislation outlaws proprietary trading by banks and bans ownership of hedge funds and private equity companies.
But the new rules would only be drafted after further study and review by a council made up of various financial regulators, including the Fed and the Treasury Department.
The Dodd bill also includes a few new twists, including a so-called Hotel California clause that would block banks such as Goldman Sachs from abandoning their newly acquired bank charters to escape federal oversight. The bill would also tighten the U.S. government's rein on the powerful Federal Reserve Bank of New York by making its president a direct White House appointee.
Mr. Dodd, a Democrat from Connecticut, called the bill "a plan for the 21st century" and vowed to push it through Congress this year, in spite of persistent opposition to key aspects from Republicans.
"We do need to act and we will act. The stakes are far too high," Mr. Dodd told reporters, rattling off the grim statistics of the recession, including 8.4 million lost jobs and nearly seven million home foreclosures.
But Republicans leaders and the banking industry vowed to continue fighting key aspects, including the ability of the consumer financial watchdog to meddle with key banking products.
And that's raised questions among analysts whether Mr. Dodd and the Democrats will be able to get the legislation passed, without further compromises.
"Reasonable reform has almost no chance of passing the Senate," said Simon Johnson, a senior fellow at the Washington-based Peterson Institute for International Economics. "This legislative cycle is almost lost already."
And yet the Obama administration and Senate Democrats are betting that public anger at bankers and Wall Street could help overcome that opposition.
"The public is demanding action," pointed out Mr. Elliott of the Brookings Institution. "They hate bankers with a passion at the moment and bankers are seen as the principal obstacle to passage of the bill."
President Barack Obama also seemed to acknowledge that the Dodd bill is not likely to be the final word.
He urged that the "ultimate bill" provide "strong, clear authority for setting and enforcing rules, limiting excessive risk-taking in the financial system, and winding down the largest financial firms when necessary."
And he said the White House would fight any attempt by the financial services industry to escape their responsibilities. "In any future crisis the big financial companies must pay, not taxpayers," Mr. Obama said in a statement.
The Financial Services Roundtable, which speaks for the big banks and financial institutions, continued to take exception to the proposed consumer watchdog. "Consumer protection should not be separated out from the regulators which govern the products," said Steve Bartlett, president of the Roundtable.