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After the Federal Deposit Insurance Corporation released its proposed “Volcker Rule,” Republicans on the House Financial Services Committee were quick to announce hearings on the proposed regulations.

It’s a Dodd-Frank paradigm that we have come to know all too well: regulators continue to make slow progress to implement the many rulemakings required under the financial reform law, and with each new regulation, Republicans haven’t been far behind, working to repeal, scale back or defund every move the regulators have made. The hotly-contested Volcker Rule has proven to be no exception.

A House Financial Services Committee spokesman said the hearing will look at the economic impact and competitiveness of the proposed rule. The hearing will likely take place in early November.

The draft rule, which was formally released by the FDIC on October 11th and was approved by the Securities and Exchange Commission this morning, is 205 pages and seeks to ban banks or institutions that own banks from engaging in proprietary trading that isn’t at the behest of their clients and from owning or investing in hedge funds or private equity funds. The rule would also limit the liabilities the largest banks could hold and preclude those banks from gaining from or hedging against short-term price movements in the securities and derivatives markets. The proposal includes exceptions for market making for customers and for hedging against risky trades made on customers’ behalf.

Proponents say that the rule will eliminate the need for future bailouts, though some are already making the case that the rule doesn’t go far enough, and it defined proprietary trading too narrowly. Major financial firms, including Goldman Sachs, JPMorgan Chase and Bank of America have already closed their proprietary trading desks in anticipation of the rule, though firms continue to argue that the rule is unnecessary, difficult to implement, and will harm their ability to compete in the global market. The GAO released a report this past summer on the Volcker Rule, noting the difficulty in detecting proprietary trading and calling it “cumbersome” and “difficult to enforce.”
The rule will be open for comment until January 2012 and would take effect on July 21, 2012 – the second anniversary of Dodd-Frank; though some say certain banks would have until 2017 to fully comply.

The Volcker Rule is a proposal by former Federal Reserve Chairman Paul Volcker to restrict U.S. banks from making certain kinds of speculative investments that do not benefit their customers. Volcker argued that this kind of proprietary trading, where deposits are used to trade on the bank’s personal accounts, played a key role in the 2008 financial crisis.

The Commodity Futures Trading Commission has said that it may put forth its own version of the Volcker rule. Scott O’Malia, a Republican commissioner at the CFTC, said he spoke to CFTC Chairman Gary Gensler on Friday and quoted the chairman as saying, "We might, if it's the will of the commission, put forward ... a virtually identical proposal with the other regulators, or we could go it alone." O’Malia continued, "He's not committing either way."

Rep. Barney Frank (D-MA), for whom Dodd-Frank is named, as well as Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI), who first introduced the Volcker rule during the Dodd-Frank debate last summer, have yet to publicly comment on the proposed rule.

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Federal regulators are continuing to field an array of questions and concerns from lawmakers surrounding the implementation of Dodd-Frank’s derivatives provisions (Title VII) – and it’s not just coming from House Republicans.

In a letter sent on Tuesday to Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and acting Comptroller of the Currency John Walsh, New York’s two Democratic Senators and 16 of New York’s 29 Representatives expressed concerns that a proposed rule applying margin requirements to derivatives between non-U.S. subsidiaries of U.S. entities and non-U.S. counterparties would create a significant competitive disadvantage for U.S. firms operating internationally.

The letter, signed by 12 Democrats and 6 Republicans, went on to state that “disparate treatment of U.S. firms will only encourage participants in the derivatives markets to do business with non-U.S. firms,” and asked that U.S. regulators work with their international counterparts to ensure that the international regulations “perfectly mirror the U.S. rules.” Senate Agriculture, Nutrition and Forestry Committee Chairwoman Debbie Stabenow (D-MI) expressed similar concerns during a Senate hearing on March 3, stating that “having a different set of rules that govern similar transactions [internationally] could have negative impacts in the markets.”

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Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, the agencies charged with implementing the Act have begun laying the groundwork for managing their new responsibilities.

The Department of Treasury’s Assistant Secretary for Financial Institutions Michael Barr provided a window into the action during his remarks to the Chicago Club yesterday. The first meeting of the Financial Stability Oversight Council (FSOC) – the council of financial regulators charged with managing systemic risk – will be in September. The Treasury is currently working to stand up the new Office of Financial Research that will support the FSOC by collecting and analyzing data pertaining to systemic risk. Internationally, Treasury is working to raise capital requirements – the ratios and the quality of the underlying capital – and also institute explicit, quantitative liquidity requirements. According to Barr, the Dodd-Frank reforms also require that, “Regulators must supplement existing approaches to supervision with mandatory ‘stress tests,’ credit exposure reporting, and ‘living wills,’ so that they can adequately assess the potential impact of the activities and risk exposures of these firms on each other, on critical markets, and on the broader financial system.”

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This afternoon the Senate passed the Dodd Frank Wall Street Reform and Consumer Protection Act by a vote of 60 to 39.  As expected, all but three Republicans -- Senators Scott Brown (MA), Olympia Snowe (ME) and Susan Collins (ME) -- voted against the bill, and Sen. Russ Feingold (D-WI) was the only Democrat to vote against it. The president is expected to sign the legislation next week.

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When House and Senate conferees return to the negotiating table next Tuesday, they will begin consideration of arguably the thorniest issue of financial reform: the newly created consumer financial protection regulator. In addition, conferees are expected to continue debating the details of FDIC resolution authority over failing financial services institutions, along with a controversial Senate derivatives title that forces banks to spin-off their swap desks.

This afternoon, House Financial Services Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT) released the following schedule for Tuesday:
 

Tuesday, June 22
• Pending offers and Counter-offers from Week One
• Consumer Financial Protection-CFPA/CFPB-title 10 of base text
• Predatory lending-title 14 of base text
• Risk retention-subtitle D of title 9 of base text
• Interchange-section 1076 of base text
• Access issues-titles 10, 12, and 14 of base text
 

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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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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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After nearly four months of delay, the Treasury on Wednesday launched the Legacy Securities program—a key component of the administration’s Public-Private Investment Program (PPIP) aimed at relieving financial institutions of illiquid assets that continue to hamper the flow of credit markets.

Scaling back the scope of the Legacy Securities program as originally envisioned in March, the Treasury, together with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, offered a framework that will provide government investments of up to $30 billion so that private sector fund managers and private investors might purchase legacy commercial mortgage-backed securities (MBS) and non-agency MBS off the balance sheets of banks and other financial institutions.

Selected from a pool of over 100 applicants, below is a list of the nine private fund managers pre-qualified by Treasury to participate in the initial round of the Legacy Securities program:

• AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC
• Angelo, Gordon & Co., L.P. and GE Capital Real Estate
• BlackRock, Inc.
• Invesco Ltd.
• Marathon Asset Management, L.P.
• Oaktree Capital Management, L.P.
• RLJ Western Asset Management, LP.
• The TCW Group, Inc.
• Wellington Management Company, LLP

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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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Investors will have to wait longer than expected for the Legacy Loans Program (LLP), the FDIC half of the Public Private Investment Program (PPIP) to relieve banks of their troubled assets. The LLP pilot, which the FDIC had originally planned to launch in June, will now be postponed indefinitely. In its place, however, the FDIC plans to “test the funding mechanism contemplated by the LLP” by selling receivership assets. The FDIC says it will draw “upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage.” The FDIC says it will “solicit bids for this sale of receivership assets in July.”

While FDIC Chairman Sheila Bair said the FDIC will continue to work on developing the legacy loans program in order to “offer it in the future,” she explained the reason for the postponement was that banks lately have been raising capital without it, reflecting “renewed investor confidence in our banking system.” She went on to say, “As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled asset sales as part of our larger efforts to strengthen the banking sector.”

There was no mention whether or not the Legacy Securities Program, which is managed by the Federal Reserve and Treasury, would be delayed. One could reasonably guess, reading between the lines, that banks have been less than enthusiastic about discounting and selling loans through the LLP.
 

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Call it green shoots or mustard seeds or hope, but according to some of the nation's leading economic experts, the outlook for the American economy is improving. These experts are venturing the opinion that the economy has hit bottom and the recession is ending. Some of the evidence cited is the fall in unemployment claims from March to April; the first quarter increases in consumer spending and consumer prices; and the stabilization in sales of existing and new homes over the past couple of months. Even Federal Reserve Chairman Ben Bernanke sounded optimistic (for a Fed Chairman) about the recovery. During testimony before the Joint Economic Committee this morning, Bernanke said, “We continue to expect economic activity to bottom out, then to turn up later this year.” Although he qualified his statement as dependent on a restored and healthy financial system, that too could be interpreted as a positive sign since the Fed is supposed to go over stress test results with the affected banks today.

Bernanke did not comment on the test results, but media leaks suggest that ten of the 19 banks will need to find more capital. The results are not supposed to be publicly available until later this week, but markets rallied somewhat yesterday based on White House spokesman Robert Gibbs’ comments that the administration does not anticipate needing more financial bailout money from Congress and suggesting the banks will be able to raise private capital.

Since unemployment is a lagging indicator, most experts predict it will be a few months before people feel the effects of an economic upturn. If the economy is pronounced in recovery by the fall, it will be far enough into his presidency that President Obama will likely receive appreciable credit . The potential return to better times could add momentum to a major administration priority: health care reform. Despite the White House Chief of Staff’s strategy of capitalizing on a crisis, we suspect the White House will find it is much easier to score congressional victories when there is hope on the horizon rather than fear.

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At last Treasury has come forward with its Public Private Investment Program for dealing with toxic assets, only now that there is a plan, the proper term is “troubled legacy assets.” Stocks have rallied since Treasury announced the plan this morning, and legislators on Capitol Hill have halted their rush to claw back the AIG bonus money, some say partly in order to study the new plan. The Treasury Secretary is scheduled to testify before the House Financial Services Committee on Thursday. Will the positive momentum continue up to and following his hearing performance? Secretary Geithner has a lot riding on this week.

The plan, which will use $100 billion of TARP funds, has two parts intended to revive the anemic financial system—the Public Private Investment Fund (PPIF) for Legacy Loans and the PPIF for Legacy Securities. Both are aimed at residential and commercial real estate-related assets. Banks tend to hold the assets as loans and entities such as insurers, pension funds, mutual funds and individual retirement accounts tend to hold the assets as securities backed by loans. The Federal Deposit Insurance Corporation with Treasury will work to create PPIFs that will purchase “loans and other asset pools” from participating banks, and the FDIC will determine eligibility criteria. The FDIC will also be using contractors to help it analyze loan pools and determine the level of debt to be issued by the PPIFs (with leverage not exceeding a 6 to 1 debt-to-equity ratio). The FDIC will then auction off each loan pool to the highest bidder. Treasury will provide 50 percent of equity financing and the private sector auction winner will provide the other 50 percent. The private sector winner can obtain financing by issuing new debt, which the FDIC will guarantee, that is collateralized by the purchase.

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

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

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On the first full day of the Obama Administration, key federal officials outlined a potential strategy for managing the government rescue of the financial sector. At his confirmation hearing today, Treasury Secretary-designate Tim Geithner told the Senate Finance Committee that the Obama Administration is considering the establishment of a “bad bank” or an “aggregator bank” that would take over the toxic asset-backed securities currently corroding the U.S. banking system. Several lawmakers have suggested the concept of a federally-operated entity modeled after the Resolution Trust Corporation, which, from 1989 to 1995, took over and liquidated 747 failed thrifts with assets of $394 billion. An aggregator bank would cost several trillion dollars according to various experts, including former Federal Reserve Chairman and current Obama economic advisor Paul Volcker.

Today Geithner assured the Senate panel that President Obama “will come before the Congress in the next few weeks and lay out to the American people a comprehensive plan to help stabilize the core of the financial system so that banks, which are so critical to our economy, are able to provide the credit necessary to get recovery going again.” He also promised to reform the TARP program with increased taxpayer protections, transparency, foreclosure mitigation for homeowners, and access to credit for small business owners.

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With each passing day it becomes more apparent that neither the Congress nor the Bush Administration has an appetite for significant new actions to aid the financial system or the economy at large before the end of the year. Congressional leaders on Thursday made it clear that passage of an economic stimulus package or a package to aid the auto industry were looking increasingly difficult. At the Treasury Department, consideration is being given to making Capital Purchase Program assistance available to non-bank financial institutions, but no guidelines for how that might happen or what form the assistance may take have emerged. Meanwhile, congressional Republicans have begun clamoring for more information on the actions Treasury and the Federal Reserve have already taken to assist ailing financial institutions and other companies.

Sen. Chuck Grassley (R-IA), Ranking Member of the Senate Finance Committee, sent a harshly worded letter to the Treasury Secretary and Federal Reserve Chairman "to express concerns and receive answers to questions" he has regarding implementation of the Emergency Economic Stabilization Act of 2008 (EESA). In a statement released along with his letter, Grassley said of the implementation thus far, "When you see so many changes, you wonder if they really know what they’re doing."

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October 23 was a busy day for Federal Deposit Insurance Corporation Chairman Sheila Bair. In the morning, she testified before the Senate Banking Committee and made headlines about what the FDIC is doing to assist homeowners avoid foreclosures. In the afternoon, she presided over an FDIC Board of Directors meeting wherein the board adopted an interim rule for implementing the Temporary Liquidity Guarantee Program.

Under the Emergency Economic Stabilization Act of 2008 (EESA), the Treasury Secretary has authority to modify mortgage loans in order to prevent foreclosures. Senate Banking Committee Chairman Chris Dodd claims authorship of those provisions in the bill. However, in recent days, Congressional Democrats have complained the Bush Administration is putting too much emphasis on shoring up banks and not enough on helping homeowners directly. In fact, earlier in the week, House Financial Services Committee Chairman Barney Frank (D-MA) and Rep. Maxine Waters (D-CA) wrote a joint letter to President Bush urging him to appoint Bair “to head a government-wide effort to supervise and coordinate” a foreclosure reduction program.

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A short time ago, Treasury Secretary Hank Paulson announced some much-awaited details about the Department’s Capital Purchase Program (CPP). The Treasury will invest $250 billion of capital to U.S. financial institutions in the form of preferred stock. Nine of the largest banks have already agreed to participate in the CPP, which leaves $125 billion remaining. Paulson stressed that the program will not be implemented on a first-come-first-served basis, stating, "Sufficient capital has been allocated so that all qualifying banks can participate."

The Department has developed a single application form for qualified, interested banks to submit to their primary federal regulator—the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, or the Office of Thrift Supervision. Once a bank’s primary regulator reviews the application, the regulator will forward the bank’s application to Treasury’s Office of Financial Stability for approval. Paulson said Treasury will "give considerable weight" to the recommendations of the federal regulators. The terms will be the same for all applicants, and regulators will use a standardized review process. Treasury will announce all transactions within 48 hours of execution; however, the Treasury will not publicly reveal any applications that are withdrawn or denied. The application deadline remains November 14, 2008.

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Many unresolved issues continue to surround the financial relief program as evidenced by a flurry of diverse actions today. The nation’s banking regulators—the Federal Reserve, the Federal Deposit Insurance Agency, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision—issued a joint release about tax relief for banking organizations that have suffered losses on their Fannie Mae and Freddie Mac holdings. The regulators will allow banking organizations “to recognize the effect of the tax change enacted in Section 301 of the Emergency Economic Stabilization Act of 2008 (EESA) in their third quarter 2008 regulatory capital calculations.” Without today’s decision, banking institutions would not have seen any tax benefit until the fourth quarter of 2008.

Also today, leaders of the Independent Community Bankers Association (ICBA) met with President Bush and Secretary Paulson to discuss the Treasury’s capital purchase program. The FDIC will be the main overseer of that program; however, institutions’ primary regulators (e.g., OCC or OTS) will assist the FDIC. The Treasury has released some details of the program, but according to an ICBA press release, more details are needed. Association leaders urged Treasury to provide “details on how mutual, Subchapter S corporation, privately held and non-publicly traded community banks can participate.”

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Treasury Department officials confirmed overnight their plan to allocate the first $250 billion of the $700 billion financial rescue package not for the purchase of troubled assets, as originally contemplated, but to inject capital into nine of the nation's largest banks in exchange for preferred shares. Calling it the TARP Capital Purchase Program, President Bush is expected to certify today that the next $100 million of the plan is required for release per the provisions of the Emergency Economic Stabilization Act of 2008.

Here is how the funds will be distributed:

Citigroup $25 billion
JP Morgan Chase $25 billion
Bank of America $25 billion (including $5 billion for its Merrill Lynch acquisition)
Wells Fargo $25 billion (including $5 billion for its Wachovia acquisition)
Goldman Sachs $10 billion
Morgan Stanley $10 billion
Bank of New York $2-3 billion
Mellon Bank $2-3 billion
State Street Bank $2-3 billion
TOTAL $126 - 129 billion.

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Last night's Senate vote on the financial rescue plan, a 74-25 victory, followed the pattern of Monday's House vote. The more conservative and liberal Senators voted against it as well as Senators in tight races. Since only one-third of the Senate must stand for re-election, the third category had much less impact than in the House.

On the House side, there are signs of positive movement on both sides of the aisle. Based on conversations with our contacts on the Hill, we believe as many as 20-25 members who voted against the package on Monday may now support the plan.

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

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

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

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

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