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This article was originally published in the February 2012 edition of Current Developments in Securities Laws by Michael E. Plunkett, Partner, Blank Rome LLP.

On February 2, 2012, and February 9, 2012, the Senate and House of Representatives, respectively, passed separate versions of the “Stop Trading on Congressional Knowledge Act” (STOCK Act) which addresses, among other matters, insider trading among certain members and employees of the federal government and the political intelligence community.1

Insider trading occurs when a person trades stocks or other securities on the basis of material, nonpublic information about the security or the issuer of the security in breach of a duty of trust or confidence, such as a duty to keep the information confidential. With respect to information that a member of the federal government gains in the course of his or her official duties, it has been difficult to show that the member has a duty to keep that information confidential or other duty of trust or confidence that would preclude trading on the basis of the confidential information. The STOCK Act provides a framework for prohibiting specified members and employees of the federal government from trading on the basis of material, nonpublic information acquired in the course of their official duties. Under both the Senate and House bills, if enacted, the new law would:

• affirm that specified members and employees of the federal government are not exempt from insider trading prohibitions; 
• require that various ethics committees and offices issue rules clarifying that specified members and employees of the federal government may not use nonpublic information derived from their positions with the federal government as a means of making a profit; 
• provide that specified members and employees of the federal government owe an affirmative duty of trust and confidence to U.S. citizens, among others, regarding material, nonpublic information derived from the performance of their official responsibilities;
• require members and employees of Congress, as well as certain members and employees of the executive branch, including the President and Vice-President, to report to the appropriate ethics office the purchase, sale, or exchange of any stocks, bonds, commodities futures or other securities within 30 days after the transaction in the Senate bill, and within 30 days after learning of the transaction but in no case more than 45 days after the transaction in the House bill. The reporting requirements do not apply to transactions involving “widely held investment funds,” such as mutual funds;
• require the creation of publicly accessible, searchable online systems for disclosed financial reports; and 
• require the Comptroller General to submit a report within one year on the sale of political intelligence (i.e. information derived from certain executive or legislative branch officials for use in analyzing securities or commodities markets).

The Senate bill includes additional provisions addressing political intelligence consultants, requiring organizations dealing in political intelligence to:

• register with the federal government upon making one or more political intelligence contacts. The provision is more stringent than similar provisions in the Lobbying Disclosure Act which require registration only if an employee makes more than one federal lobbying contact for a client and devotes 20% or more of his or her time to federal lobbying activities for the client in a 3-month period; and
• submit semiannual reports identifying their clients and the issues for which they engaged in political intelligence activities.

The bills will be sent to conference for reconciliation. If enacted, the STOCK Act should affirmatively establish the basis for prohibiting members of Congress and other high level federal employees from profiting based on material, nonpublic information during the course of their official duties under generally applicable securities laws. In addition, it should lead to enhanced disclosure of the activities of the political intelligence community.

To see the full February 2012 newsletter, please click here. 

1. See S. 2038, 112th Cong. (as passed by Senate, Feb. 2, 2012), available at http://www.gpo.gov/fdsys/pkg/BILLS-112s2038es/pdf/BILLS-112s2038es.pdf; S. 2038, 112th Cong. (as amended and passed by the House of Representatives, Feb. 9, 2012), available at http://www.gpo.gov/fdsys/pkg/BILLS-112s2038eah/pdf/BILLS-112s2038eah.pdf.
2. See 17 C.F.R. §240.10b5-2(b)(1). The insider trading laws can also be breached in other ways, such as by providing confidential information to another so that person may trade on the basis of the information.
3. Political intelligence is defined by the Act as information derived by a person from direct communication with an executive branch employee, a member of Congress, or an employee of Congress and provided in exchange for financial compensation to a client who intends, and who is known to intend, to use the information to inform investment decisions.

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Following President Obama’s January 4th announcement that he would install former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB) using a recess appointment, a hailstorm of controversy has ensued, as lawyers, legislators and industry question the legitimacy of the move – and look for ways to undermine it.

Lawyers:

Following the appointment, the Office of Legal Counsel stated that Congress can only prevent the president from making such appointments “by remaining continuously in session and available to receive and act on nominations,” not by holding pro forma sessions.

Senate Republicans, led by Sen. Chuck Grassley, Ranking Member of the Senate Judiciary Committee, accused the president of ignoring more than 90 years of legal precedent in making the recess appointments while the Senate remained in pro forma session. “The Justice Department and the White House owe it to the American people to provide a clear understanding of the process that transpired and the rationale it used to circumvent the checks and balances promised by the Constitution,” Grassley said. “Overturning 90 years of historical precedent is a major shift in policy that should not be done in a legal opinion made behind closed doors hidden from public scrutiny.” The letter was signed by Senate Judiciary Committee members Grassley, Sen. Orrin Hatch (R-UT), Sen. Jon Kyl (R-AZ), Sen. Jeff Sessions (R-AL), Sen. Lindsey Graham (R-SC), Sen. John Cornyn (R-TX), Sen. Mike Lee (R-UT), and Sen. Tom Coburn (R-OK).

On January 12, the Department of Justice issued a memo arguing that pro forma sessions held every third day in the Senate do not constitute a functioning body that can render advice and consent on the president’s nominees. It said the president acted consistently under the law by making the appointments. “Although the Senate will have held pro forma sessions regularly from January 3 to January 23, in our judgment, those sessions do not interrupt the intrasession recess in a manner that would preclude the president from determining that the Senate remains unavailable throughout to ‘receive communications from the president or participate as a body in making appointments,’” Virginia Seitz, assistant attorney general for the Office of Legal Counsel, wrote in the memo dated Jan. 6.

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In the 17 months since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), implementation has progressed slowly. Financial regulators have finalized 74 of the 243 rules required by the Act and have conducted 39 of the 87 required studies.

The regulatory process is significantly behind schedule. Regulators have proposed an additional 128 rules but have failed to finalize them by their statutory deadlines. The regulators have yet to propose 26 rules that were set to be finalized by the end of 2011. Heading into 2012, regulators will have some catching up to do, though many regulators, namely Securities and Exchange Commission (SEC) Chair Mary Schapiro and Commodity Futures Trading Commission Chair Gary Gensler, have repeatedly emphasized that they are more focused on “getting the rules right” than they are on meeting deadlines. Coupled with House Republicans’ ongoing attempts to stall regulations by cutting funding to regulators, the regulatory process will likely extend far longer than originally intended.

Title VII of Dodd-Frank, which deals with the regulation of the over-the-counter swaps markets, is one area to watch in 2012. Dodd-Frank brings the over-the-counter derivatives market under significant government regulation for the first time. Many types of derivatives will now have to be traded on exchanges and routed through clearinghouses, with regulators examining trades before they are cleared. Derivatives are jointly regulated by the CFTC and the SEC, and both regulators are significantly behind schedule.

Thus far, regulators have missed 71 Title VII rulemaking deadlines. The first quarter of 2012 is set to be the busiest time for regulators, with 25 new regulations due by March 30; 14 of which have yet to be proposed. There are an additional 16 new regulations due in the third quarter of 2012, as well as the 152 rulemakings that remain behind schedule. The upcoming year also calls for an additional 28 studies. The bulk of these studies (11) are to be conducted by the Government Accountability Office (GAO), though the SEC and the bank regulators will likely see a significant burden as well, in addition to their rulemaking responsibilities.

There have been many legislative attempts to stall, scale back, defund or otherwise prevent the implementation of Title VII. Republicans, namely Senate Majority Leader Mitch McConnell (R-KY), have said that “anything we can do to slow down, deter, or impede” the regulators’ agenda would be “good for our country.” While Republicans will likely continue to fight most of the regulations, many in industry view the rules as inevitable and have encouraged regulators to finalize them as soon as possible to give companies sufficient time to prepare for implementation.

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Yesterday the Commodity Futures Trading Commission (CFTC) unveiled the latest iteration of regulations required under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “Volcker Rule.” Named for former Federal Reserve Chairman Paul Volcker, the rule restricts banking entities from engaging in short-term proprietary trading for their own accounts and from sponsorship of hedge or private equity funds.

Under the proposed rule, banks would be required to establish internal compliance programs designed to monitor compliance with Section 619 and the accompanying regulations. Firms will also be required to report “certain quantitative measurements” to regulators to assist them in distinguishing prohibited proprietary trading from permitted activities.

The rule is almost identical to the Joint Volcker Rule proposed by the Federal Reserve, the Office of the Comptroller of the Currency, Treasury, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission in October 2011. Those rules have come under fire even by Volcker himself, in recent months for their length and complexity. "It's much more complicated than I would like to see," Volcker said in November. 

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This morning, Senate Republicans made good on their promise to block former Ohio Attorney General Richard Cordray’s nomination as director of the Consumer Financial Protection Bureau.

The Senate voted 53-45 to proceed with the confirmation, falling short of the 60 votes needed to prevent a filibuster. All but two Republicans voted to sustain the filibuster. Sen. Scott Brown (R-MA) is the only Republican Senator to publicly support Cordray, likely because he finds himself in a tight Senate race against CFPB architect Elizabeth Warren. Sen. Olympia Snowe (R-ME), who was one of only three Republicans to vote for Dodd-Frank, voted present.

So what comes next? The general consensus is: Nothing.

The House has taken steps over the last several months to prevent a recess appointment, and will likely continue to do so. The Obama Administration has not shown any sign of willingness to back down and change the bureau’s structure, nor is nominating another potential director likely to do any good. Republicans have made it clear that their hesitation has nothing to do with any individual candidate (though many believe Cordray was chosen in part because he is far less controversial than Warren); and no Senator on either side is likely to flip-flop on this issue going into an election year. In all likelihood, both sides will use it as a talking point throughout the 2012 election, with Democrats blaming Republicans for handicapping an agency aimed at protecting consumers and Republicans blaming Democrats for creating a regulatory agency without sufficient mechanisms to limit the director’s authority.

The Obama Administration has fought to rally support around Cordray in recent months. The CFPB has been operating without a director since it opened its doors on July 21, 2011, meaning that its authority is limited to banks and does not extend to non-banking financial institutions, including debt collectors, payday lenders and mortgage servicers. In May, 44 Republicans Senators sent a letter to President Obama vowing to block any nominee for director until the Bureau is restructured, namely by replacing its single director with a 5-person board. Senate Republican leaders have said that they are still waiting for a response to their letter.

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Rep. Barney Frank (D-MA), Ranking Member of the House Financial Services Committee, Father of Financial Regulatory Reform, and 16-term Congressman announced today that he will not be seeking re-election in 2012. Regardless of politics, few can deny that Rep. Frank has been a giant in the U.S. Congress, particularly in the financial sector, and that he will leave enormous shoes to fill. Within hours of the announcement, rumors began to circulate as to which Democrat will assume his prized seat on the financial services committee. Here are the top contenders:

Rep. Maxine Waters (D-CA):

Rep. Waters, the second most senior Democrat on the committee, is believed by many to be the top choice, and sources say she wasted no time this afternoon before lobbying Members for support. Now in her 11th term in Congress, Waters is the Ranking Member of the powerful Subcommittee on Capital Markets and Government-Sponsored Enterprises and has chaired the Congressional Black Caucus. While Waters is the heir apparent, there may be obstacles in her way. She is currently under investigation by the House ethics committee for three alleged violations. The investigation will certainly continue into 2012. If the committee finds she violated House rules and/or refers her case to the Justice Department, her chances for committee leadership may diminish.

Rep. Carolyn Maloney (D-NY):

Rep. Maloney is next in line after Waters and will certainly rise in influence following Rep. Frank’s departure. Elected in 1993, Maloney has a long history as an active, comparatively moderate member of the committee, and also has ties to the home of the nation’s financial sector. Rep. Maloney has chaired the Joint Economic Committee as well as the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. She was also the author of the Credit Card Accountability, Responsibility and Disclosure Act, also known as the “Credit Card Bill of Rights,” and has been called “the best friend a credit card user ever had.” Given the controversy surrounding Waters and industry’s potential preference for a more moderate voice, some speculate that Maloney could surpass Waters and take the top spot.

The speculation will certainly continue throughout the coming year, but no definitive answer will come until the 113th Congress is sworn in in 2013.

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Well, at least they didn’t drag it out over Thanksgiving.

Shortly before 5 p.m. on November 21, 2011, Supercommittee Co-Chairs Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX) released a joint statement telling the world what it already knew: it was all over. While many had hoped for the sort last-minute compromise we have come to expect from this Congress, this time it just wasn’t in the cards. While the blame game is sure to continue for months (likely all 12 months between now and Election 2012), we turn our attention to what could happen next.

Option 1: Sequestration

It was supposed to be a deterrent, a fate so unthinkable it would force the Supercommittee into action. Now, it may become reality. Under the terms of the debt ceiling agreement, across-the-board spending cuts will be automatically triggered that will equal the $1.2 trillion in savings the Supercommittee failed to create. The first automatic cuts are split equally between security and non-security spending and are set to take effect on January 2, 2013. Security funding includes the Department of Dense, the Department of Energy nuclear-weapons related activities and the National Nuclear Security Administration, among other agencies. Security spending would be capped at $546 billion in FY 2013 and at $556 billion in FY 2014. All other non-security funding—including military construction, Veterans Affairs and Homeland Security funding—would be capped at $501 billion in fiscal 2013 and $510 billion in fiscal 2014. Under sequestration, Medicare will face limited cuts, but Social Security, Medicaid, veterans and civil and military pay, funding for the wars in Iraq and Afghanistan and overseas contingency operations will be excluded entirely.
 

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CDO and CLO Managers are assessing reporting requirements under Form PF, jointly promulgated by the SEC and the CFTC as required under the Dodd-Frank Act.¹ One recent issue raised by some managers who are registered investment advisers is whether assets held in CDOs and CLOs must be included for purposes of determining Form PF reporting thresholds for "private funds," "hedge funds" and "private equity funds."

On October 31st, the Commodity Futures Trading Commission (the "CFTC") and the Securities and Exchange Commission (the "SEC") jointly announced final rules relating to new reporting requirements for advisers of certain private funds, commodity pool operators and commodity trading advisors.² The new rule will require filing of Form PF (for "private fund") by investment advisers registered with the SEC that advise private funds having at least $150 million in assets under management. Most registered investment advisers are expected to make annual filings; however, certain large fund advisers, including those with at least $1.5 billion in assets under management attributable to hedge funds, will be required to file more detailed information on a quarterly basis. These new reporting requirements are primarily intended to provide the Financial Stability Oversight Committee, the SEC and the CFTC with important information about systemic risk in the private fund industry.

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Regulations to implement the Volcker Rule have hit the street. Now a new phase of the battle to reign-in proprietary trading by banks is at hand. If past is prologue, a tough and divisive battle looms. Meanwhile, the industry, regulators and customers will be dealing with the uncertainty that has bedeviled all concerned since Dodd-Frank was enacted.

How did we get here? How did a ten-page provision in legislative language end up being a 298 page proposed rule? When the industry, its lobbyists, its supporters on Capitol Hill and regulators all do what they do best, a complicated, lengthy and unwieldy set of rules is the result.
From the beginning, the banking industry has been openly opposed to the Volcker Rule. The effort to sidetrack it was unsuccessful, but the legislation did provide for exceptions to the rule to be developed by regulators.

That created the opening, and ever since enactment of the bill, industry representatives have been working to ensure the proposed regulations define, as generously as possible, the types of exceptions under which banks may trade through their own accounts. Regulators made an attempt to deal with all these issues. The resulting rules regarding market making trades, trades with and for international customers and others will allow limited proprietary trading to take place.

Now the rule is under attack by some for being too weak and others for being too cumbersome and unwieldy. Congressional hearings and proposals to repeal the Volcker Rule can be expected. A classic Washington stand-off is unfolding.

All of this will extend the uncertainty hanging over this process. The industry and its supporters may well harbor hopes that a Republican victory in the 2012 election would result in both Houses of Congress and the White House being in the hands of those supporting Volcker Rule repeal. So it may well be deep into 2013 before anyone can confidently assert the Volcker Rule process is complete.

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The Consumer Financial Protection Bureau (CFPB) may not have a director, but that hasn’t stopped if from getting straight to work. Although its powers are limited until the Senate confirms a director, the CFPB recently kicked off two major efforts that prove it isn’t letting Senate Republicans slow it down.

Today, the CFPB and the Department of Education announced that they are working together to simplify financial aid offers for college students. The “thought starter,” (CFPB officials were careful to emphasize that this was not a formal proposal), would require all financial aid providers to supply students with a one-page “shopping sheet” containing basic information including the total cost of attendance, total debt at graduation and monthly debt payments thereafter. It also requires clear distinctions between scholarships, which do not have to be repaid, and loans. The new disclosure aims to make the costs and risks of student loans easier to understand and comes as part of the CFPB’s broader “Know Before You Owe” initiative; aimed at simplifying the paperwork borrowers receive when applying for loans.

Earlier this month, the CFPB issued the “CFPB Supervision and Examination Manual,” describing the supervision and examination process, outlining specific examination procedures and presenting templates for documentation. The CFPB has stated that these procedures will be used to examine “supervised entities.” This perhaps purposely vague characterization may reflect the bureau’s hope that it will soon enjoy its full authority, rather than being limited to bank oversight. In this vein, the CFPB included examination procedures related to compliance with a number of statutes, which, while applicable to banks, could have broad applications to a number of non-bank institutions.

Meanwhile, the CFPB awaits a director. The Obama Administration has pulled out all the stops to rally support around former Ohio Attorney General Richard Cordray, who was nominated by President Obama on July 17, 2011 and approved by the Senate Banking Committee on October 6, 2011. The Obama 2012 campaign website includes a tool enabling supporters to send one of four prewritten messages to the 44 GOP Senators who have vowed to block Cordray’s confirmation until the CFPB is restructured. Last week, The National Association of Attorneys General sent a letter to Senate leaders supporting Cordray’s nomination. Thirty-seven state attorneys general signed the letter, which they said was intended to put pressure on Senate Republicans to explain “why they aren’t acting.”

Ranking Member of the Senate Banking Committee Sen. Richard Shelby (R-AL) countered saying that he and his Republican colleagues sent the president a letter in May and never received a response. Said Shelby, “We haven’t heard from the president. Maybe he’s off campaigning,”
 

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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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The Senate Committee on Banking, Housing and Urban Development voted this morning to confirm former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau. The committee approved the nomination by a party-line vote of 12 to 10, with all Republican members voting against, as they have repeatedly vowed to do until the CFPB is restructured. The nomination must now come to a vote before the full Senate to complete Mr. Cordray’s confirmation. However, Minority Leader Mitch McConnell has united the Republican caucus to block the nomination (until the bureau is restructured), and it is unclear when the Senate will actually take up the nomination. The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act and officially opened its doors on July 21, 2011, but its powers are limited until it has a Senate-confirmed director.

The Senate Committee also unanimously approved the nominations of Alan B. Krueger to be a Member of the Council of Economic Advisers; David A. Montoya to be Inspector General, U.S. Department of Housing and Urban Development; Cyrus Amir-Mokri to be an Assistant Secretary of the Treasury, U.S. Department of the Treasury; Patricia M. Loui to be a Member of the Board of Directors, Export-Import Bank of the United States; and Larry W. Walther to be a Member of the Board of Directors, Export-Import Bank of the United States.

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For one of the first times in the Dodd-Frank debate, House Democrats and financial services industry leaders find themselves on the same side of the debate over harmonization of fiduciary standards for investment advisers and broker-dealers. Meanwhile, as the SEC opens the door for the designation of self-regulatory organizations, House Republicans appear to be at a turning point.

Fourteen months ago, banks were railing against the idea of adopting a single fiduciary standard for both investment advisers and broker-dealers, saying that it paints two very different services with the same brush and harms U.S. firms’ ability to compete worldwide. But in a hearing yesterday, stakeholders appear to have reached a compromise, following the publication of the SEC study, mandated under Section 913 of Dodd-Frank, which called for the development of a fiduciary standard for broker-dealers. The SEC staff recommended harmonizing regulation of investment advisers and broker-dealers and establishing a fiduciary duty for both, but does not subject them both to the Investment Advisers Act of 1940 (“the ’40 Act”), as industry feared. The study also suggests three possible approaches to regulatory reform, including designating self-regulatory organizations (SROs) to oversee broker-dealers.

Winners:

• Banks, for their part, got most of what they wanted. The SEC report failed to show any empirical evidence demonstrating a need for the change, and it concluded that subjecting broker dealers to the ’40 Act would be inappropriate, as banks have maintained from the offset.
• House Democrats appeared pleased with the proposals, which will increase regulation of financial professionals and could open the door for additional funding for the cash-strapped SEC. Further, industry called for any regulatory actions to be performed with strict Congressional oversight, preserving a strong government role in the financial sector for the foreseeable future.

Losers:

• The SEC’s report has been criticized by stakeholders on both sides of the debate for failing to include enough empirical evidence of a problem, opening the door for many to criticize regulators for, once again, regulating for regulation’s sake. Further, the commission was lambasted throughout the hearing for its demonstrated inability to carry out its many new responsibilities under Dodd-Frank. When faced with a choice between ceding some authority to FINRA or being tasked with additional regulatory responsibilities it cannot afford, it is tough to see an upside for the agency.
• The Department of Labor’s proposal to broaden the definition of fiduciary standard to more financial professionals, including those who oversee IRAs, drew criticism from all sides as being ill-conceived and damaging to those who are already struggling to save for retirement in a volatile economic climate.

TBD:

• FINRA’s request to be designated as an SRO has the support of House Republicans as well as industry and could be an opportunity to scale back, even slightly, the growing government role in the financial sector and demonstrate that self-regulation can work. On the other hand, as House Democrats appear determined to paint the organization as “the ones that missed Madoff,” regulation could end up in the hands of the SEC.
• House Republicans maintain that there has not been a demonstrated need for reform and are using the Department of Labor’s proposal as evidence of the Obama Administration’s desire to over-regulate and expand the size of government. However, the reforms seem to be moving forward regardless of the criticisms. The House GOP could score a big win if Financial Services Committee Chairman Spencer Bachus’s (R-AL) proposal to designate FINRA as an SRO becomes law and the private sector is able to regain some autonomy. If not, the SEC’s role will continue to grow and Republicans will face renewed pressure to increase its funding.

The SEC has yet to propose rules related to its study, and Rep. Bachus has not said when his legislation, still in draft form, will be introduced.

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The Joint Select Committee on Deficit Reduction, nicknamed the “Super Committee”, held its first substantive hearing today, entitled “The History and Drivers of Our Nation’s Debt and Its Threats.” The committee heard testimony from Dr. Douglas Elmendorf, Director of the Congressional Budget Office (CBO), and a former Brookings Institute fellow, who was named to the post by Democrats in January 2009. Co-Chair Senator Patty Murray (D-WA) chaired today’s hearing as it was held on the Senate side. She will alternate with her co-chairman, Rep. Jeb Hensarling (R-TX), who will chair the hearings held on the House side.

The Super Committee must identify $1.5 trillion in budgetary savings over ten years from spending cuts and increases in tax revenues by November 23rd. If that does not happen, across-the-board cuts will be triggered by the end of the year, including in defense spending. The panel’s work became even more complicated on Monday as President Obama sent his $450 billion jobs plan to Congress and asked that it be paid for by ending certain corporate tax breaks and limiting tax deductions for the wealthy. In advance of today’s hearing, Rep. Hensarling said that Obama’s plan would “make an already arduous challenge of finding bipartisan agreement on deficit reduction nearly impossible, removing our options for deficit reduction for a plan that won’t reduce the deficit by one penny.”

During the members’ opening statements, many of the Republicans on the 12-member Super Committee blamed the rising cost of Medicare, Social Security and other entitlement programs, as the key drivers of the nation’s debt, while Democrats pointed to the economic meltdown, costly wars in Iraq and Afghanistan, the Bush tax cuts, and government bailouts. Rep. Hensarling made it clear during his opening remarks that the key to credible deficit reduction is a jobs program that does not raise taxes. Rep. Jim Clyburn (D-SC), in contrast, stated that, “We must balance the budget with a balanced approach that includes job creation and revenue raisers.” Sen. John Kerry (D-MA) argued that the panel needs to “go big” and reach savings of more than $1.5 trillion over ten years, easily exceeding the $1.2 trillion in savings that the panel has been required to meet. Sen. Kerry’s call for more than $1.5 trillion in long-term savings follows a letter that more than 60 business leaders and former government officials sent to congressional leaders and the Super Committee yesterday, urging that the panel cut more than the savings it is assigned to find. Among those signing the letter were Roger Altman, founder and Chairman of Evercore Partners, and former Senators Judd Gregg (R-NH) and Bob Kerrey (D-NE). Former Sen. Alan Simpson (R-WY), who co-chaired the 2010 debt commission, has also referred to the Super Committee’s savings goal as “peanuts”. Republican members of the Super Committee have argued that any plan to increase its savings mandate would make a bipartisan agreement impossible.

During his prepared remarks, Dr. Elmendorf warned that the nation’s current economic policies make attaining a sustainable federal budget impossible, citing an aging population and rising healthcare costs specifically. He told the Super Committee that the United States must deviate from its current policies in at least one of three ways: (1) Raise federal revenues significantly above their average share of GDP; (2) Make major changes to the sorts of benefits provided for elderly Americans; or (3) Substantially reduce the role of the rest of the federal government relative to the size of the economy.

Throughout the hearing, Elmendorf made it clear that the United States won’t be able to keep up its spending policies while keeping current tax policies in place. He told the committee that recovery is ongoing but is moving at a much slower pace than anticipated and that the CBO has lowered its forecast for economic growth from the agency’s August estimate of 2.3 percent to about 1.5 percent through the end of 2012. He added that he believes the unemployment rate will stay close to 9 percent during that time period.

The Super Committee launched its website today. The link can be found here http://deficitreduction.senate.gov/public/ 

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Amid rumors that Consumer Financial Protection Bureau creator Elizabeth Warren is planning to take on one Senate Republican, it appears she’s decided to go to battle against all of them.

The former Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau published an op-ed yesterday where she announced that she has started a petition calling on Senate Republicans to confirm Former Ohio Attorney General Richard Cordray as director of the CFPB and to protect the interests of middle class families, rather than those of big banks.

Warren has certainly amped up her rhetoric since leaving Washington this summer and returning to Harvard Law School. The once-reserved Warren called Republican’s behavior “outrageous” and said she was “proud to have been part of the David vs. Goliath effort that led to the passage of this new agency.”

“I've made my life's work fighting for middle class families and pushing back against special interests. I know what it means to live one pink slip or one health crisis away from economic disaster, because I did. That's why I'm working so hard to change things,” Warren wrote.

Her petition, “Tell Senate Republicans: Let the CFPB Do Its Work!” states, “The big banks and their army of lobbyists couldn't stop the creation of a new [CFPB], so now they are trying to undermine its work, enlisting their Republicans friends on the Senate Banking Committee. It's outrageous — and we've got to hold them accountable."

Forty-four Senate Republicans signed a letter earlier this year, vowing to block any nominee for CFPB director until structural changes are made to the bureau.

The petition is posted on the “Elizabeth Warren for Massachusetts” website, the official website of her exploratory committee as she considers running against Massachusetts Republican Sen. Scott Brown in 2012. Sen. Brown was one of three Republicans not to sign the letter and has remained largely silent on the issue, despite being one of the swing votes to pass the Dodd-Frank Consumer Protection and Financial Regulatory Reform Act, which created the bureau. Warren has yet to announce her candidacy, but key Massachusetts Democrats say the announcement is coming soon. Sen. Brown, who defeated Massachusetts Attorney General Martha Coakley in a special election following the late Sen. Ted Kennedy (D-MA)’s death, has been surprisingly popular in notoriously liberal Massachusetts, but recent polls suggest that Warren could give him a run for his money, polling only 9 points behind the incumbent this week.

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The Joint Select Committee on Deficit Reduction held its first hearing today, with each member delivering an opening statement, followed by a vote on the rules of the committee.

The Members’ opening statements were remarkably consistent in their calls for a bipartisan solution that will not only reduce the deficit but also create jobs and spur economic growth. Co-Chair Rep. Jeb Hensarling (R-TX) said “Deficit reduction and a path to fiscal sustainability are themselves a jobs program.” Sen. John Kerry (D-MA) echoed his sentiment, saying “We can’t fix our budget without fixing jobs, and we can’t fix jobs without fixing our budget.”

Members on both sides of the aisle emphasized that they intend to build on existing deficit reduction plans, specifically citing the Domenici-Rivlin, Simpson-Bowles and Gang of Six proposals, saying that with such limited time, they plan to take full advantage of the work that has already been done. Sens. Rob Portman (R-OH) and Kerry also said that while cutting $1.5 trillion in spending poses an unprecedented challenge, they hope that the Committee will “aim higher” and further reduce spending.

Rep. Hensarling said that the Joint Committee rules will be similar to the rules of any standing committee in the House or the Senate and that he and co-chair Sen. Patty Murray (D-WA) will alternate serving as chair of the hearings. He went on to say that the committee aims to be as transparent as possible and will be as accessible to the public as any other committee, with the caveat that, like other committees, there will also be closed-door discussions and working sessions open only to committee members. Sen. Murray added that she and Rep. Hensarling are in the process of drafting the hearing schedule and that all hearings will be announced at least seven days in advance. The next hearing, entitled “The History and Drivers of Our Nation’s Debt,” will be held on Tuesday, September 13th.

Developed under the Budget Control Act of 2011, the 12-member bipartisan committee is required to develop a proposal to cut the deficit by at least $1.5 trillion over 10 years. The committee is comprised of six Representatives and six Senators and is co-chaired by Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA). Representatives Dave Camp (R-MI), Fred Upton (R-MI), Chris Van Hollen (D-MD), James Clyburn (D-SC), Xavier Becerra (D-CA) and Senators Max Baucus (D-MT), John Kerry (D-MA), Jon Kyl (R-AZ), Pat Toomey (R-PA) and Rob Portman (R-OH) also serve on the committee. The committee is required to report its proposal to Congress by November 23, 2011. Both the House and Senate must vote the Joint Committee Proposal up or down, without any amendments, by December 23, 2011.
 

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During yesterday’s Senate Banking Committee nomination hearing, Senators on both sides of the aisle assured Richard Cordray, the president’s nominee for director of the Consumer Financial Protection Bureau, that he is not the problem.

Tuesday’s nomination hearing stood in stark contrast to the hearings held in both the House and the Senate over the past year, where CFPB creator  and once-presumed director Elizabeth Warren faced harsh, often personal attacks from many House and Senate Republicans. Cordray, on the other hand, received nothing but compliments from committee members, who instead launched their criticisms at each other and/or the structure of the new bureau.

Democrats blasted Senate Republicans for stalling the confirmation process. Senate Banking Committee Chairman Tim Johnson (D-SD) touted the many checks imposed on the director’s authority, saying that Republican “claims that the CFPB is not accountable are little more than efforts to destroy this important agency.” He went on to accuse his GOP colleagues of “playing political games” and “holding Mr. Cordray’s nomination hostage.” His fellow Democrats echoed these criticisms, asking Cordray if he had heard a single member of the Senate question his qualifications to lead the CFPB (he had not) and blasting Republicans for trying to “re-legislate” a bill which was passed by the Congress with (albeit minimal) bipartisan support.

Republicans maintained their contention that the CFPB lacks sufficient checks and balances and reiterated their promise to block the confirmation until structural changes are made to the bureau. Ranking Member Richard Shelby (R-AL) said that the hearing was “quite premature” and criticized President Obama and Senate Democrats for “ignoring the reasonable reforms” Senate Republicans proposed earlier this year. Sen. Bob Corker (R-TN) said that he was “shocked” by how partisan the committee had become and by “how many mistruths were being spewed” by Democrats. Corker asserted that the CFPB clearly lacks meaningful accountability and cited as evidence the language in Dodd-Frank instructing that the director’s actions can only be overruled by the Financial Stability Oversight Council if those actions “undermine the stability of the U.S. Financial System.” Both Sen. Shelby and Sen. Corker apologized to Cordray about being “caught up in all of this,” but warned that the Republicans will not give in until the changes are made.

While the Democrats have the votes to advance the nomination out of committee, 44 Republicans, including Senate Minority Leader Mitch McConnell (R-KY), have vowed to block any nominee for director until the CFPB is restructured, and as of yet, neither side shows any signs of compromise.

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This article [PDF] was originally published in the Harvard Business Law Review on July 28, 2011.

Addressing a joint session of Congress for the first time in February 2009, President Obama asked Congress to “put in place tough, new common-sense rules of the road so that our financial market rewards drive and innovation, and punishes short-cuts and abuse.” [1] Nine months later, on November 3rd, then-Financial Services Committee Chairman Barney Frank (D-MA) introduced the Financial Stability Improvement Act.[2] The bill grew exponentially throughout the month of November, and by the time H.R. 4173 came before the full House of Representatives on December 10th, Rep. Frank’s 380-page bill had expanded to 1,279 pages. When the final conference bill was signed into law on July 21, 2010, not only was it the most significant regulatory overhaul since the New Deal, but at almost 2,400 pages,[3] it was more than twice the length of the three previous regulatory bills – the Securities Act of 1933, the Securities Exchange Act of 1934 and Sarbanes-Oxley – combined.

In the year since Dodd-Frank was enacted, Republicans have launched countless attacks against it, claiming that it is too costly and unnecessarily increases the size of government.[4] They have argued that the Volcker rule and derivative regulations harm U.S. competitiveness overseas, that regulatory agencies are overfunded, and that the Consumer Financial Protection Bureau (CFPB) and Office of Financial Research (OFR) have too much power and are not subject to enough oversight.[5] Republicans, especially those in the House, have introduced bills to repeal Dodd-Frank in its entirety or scale back, defund, delay or otherwise prevent regulators from implementing individual provisions.

Given the rules of the House and the strength of the Republican majority, House Democratic proponents of Dodd-Frank have little recourse but to criticize attempts to overturn Dodd-Frank or portions of it. The Democratic-controlled Senate is another story. In the upper chamber, some have described Senate Banking Committee Democrats as circling the wagons around Dodd-Frank and fending off any and all attempts to amend or repeal it.[6] The committee’s oversight agenda has been noticeably less active than in past years, and some claim the reason is that the new Senate Banking Committee Chairman Tim Johnson (D-SD) is trying to refute Democratic colleagues’ criticisms that he has been too ‘pro-bank’ in the past.[7] 

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It’s been called the birthday; the anniversary; the implementation deadline; the day the doors open; the transfer date; the rulemaking deadline; and more. By whatever terminology, July 21, 2011, Dodd-Frank’s first birthday, should have been a big day. When the countdown ended, however, and Thursday finally rolled around, it all began to feel a bit anti-climactic.

The Rulemakings: Of the 163 required rulemakings that had to be finalized by July 21, only 33, a mere 20 percent have been completed. Overall, only 51, or 13 percent of the total rulemakings required by Dodd-Frank have been finalized. Between the two key deadlines – July 16 (360 days after passage) and July 21 (one year after passage) – there were 117 rulemaking requirements, only 13 of which were actually met. There remain 104 requirements, or 88 percent, that have yet to be fulfilled.

The Studies: Dodd-Frank also requires a multitude of studies, and on the whole, agencies have been more successful in completing those on time. Regulators only failed to complete 3 of the 17 studies required this quarter.

The Agencies: The CFPB, the most anticipated of the new agencies, officially opened on Thursday, but has limited authority until it has a confirmed director. The SEC has missed the most deadlines, at 54, followed closely by the CFTC, which has missed 39. Both SEC Chairman Mary Shapiro and CFTC Chairman Gary Gensler have blamed the delays on limited resources, saying that unless they receive considerable funding increases, the delays will only continue. Regulators will spend $400 million implementing Dodd-Frank in 2011. That number is expected to triple to $1.2 billion in 2012, as regulatory agencies continue to add staff and increase oversight efforts. The House Appropriations Committee passed bills imposing deep cuts in the regulators’ budgets. Those bills have yet to come to a vote before the full House and are unlikely to pass the Senate. Under statute, regulators are also empowered to assess fees to the firms they regulate to bring in additional revenue.

The Leadership: Four regulatory agencies lack key leadership personnel, and all have significant staffing left to do. The president’s nominees for chairman of the FDIC, Comptroller of the Currency and a Member of the Financial Stability Oversight Council are set to appear before the Senate Banking Committee tomorrow. A hearing date has yet to be set for the president’s most controversial nomination, that of director of the Consumer Financial Protection Bureau. Senate Republicans have vowed to block any nominee for CFPB director, but have not vocally opposed the other nominations.

By all accounts, the first year of Dodd-Frank was just the beginning, but as Republicans in Congress continue their efforts to chip away at financial reform, it remains to be seen how many anniversaries it will take for Dodd-Frank to become a reality.
 

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The Consumer Financial Protection Bureau (CFPB) officially opened its doors yesterday and wasted no time before assuming its duties. The bureau sent letters to the CEOs of the financial institutions that fall under its supervision and opened its new consumer complaint hotline. In the coming week, it is expected to issue three reports to Congress: one examining the differences between credit scores sold to consumers and scores used by lenders to make credit decisions; one recommending a strategy for maximizing transparency and disclosure of exchange rate information; and one outlining the recruitment, training, benefits and retention plans for CFPB staff. The CFPB will also issue several interim rules, outlining protocols ranging from record-keeping to investigation and enforcement.

The House celebrated Dodd-Frank’s birthday by voting to change the structure and oversight authority of the Consumer Financial Protection Bureau (CFPB). By a count of 241-173, the House voted to replace the CFPB director with a five-person board, making it more similar to the leadership structures of the other financial regulators. The bill also empowers the Financial Stability Oversight Council (FSOC) to overturn CFPB regulations with a simple majority vote. Under Dodd-Frank, the FSOC needs a two-thirds vote to overturn any CFPB rulings. The House bill also requires that the CFPB have a Senate-confirmed director before it takes on any of its authority, not simply its authority over non-banks, as the Act requires. Ten Democrats voted for the measure, and one Republican, Rep. Walter Jones (R-NC), voted against it.

Most Democrats say the House bill is yet another attempt to undermine the CFPB’s authority. The bill now heads to the Senate, where it is unlikely to garner sufficient Democratic support to pass.

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Ever since the earliest whispers of Dodd-Frank, it’s been all about the numbers. From the $648 billion the Congressional Budget Office estimates the September 2008 economic collapse cost the United States, to the 1,010.14 points the Dow swung in a matter of minutes during the infamous May 6, 2010 Flash Crash, the financial crisis of the late 2000s has given the global financial markets more numbers to contend with than anyone could be expected to digest. With the passage of Dodd-Frank, the federal government’s legislative reaction to the crisis, the U.S. Congress has given us a few more:

• $1,000,000,000,000+ the broader economic costs of Dodd-Frank, according to some estimates.
• $19,000,000,000 the size of the bank tax that Sen. Scott Brown (R-MA) successfully removed during the conference process
• $2,900,000,000 the cost of Dodd-Frank implementation over the next 5 years
• $1,800,000,000 the implementation cost for commodities traders
• 383,013 words in Dodd-Frank
• 100,000 non-banking firms that could be regulated by the Consumer Financial Protection Bureau (CFPB)
• 2,600 new positions at regulatory agencies
• 2,319 pages in the final bill (vs. 2,409 for health care reform).
• 533 new regulations
• 243 rules created by Dodd-Frank (Sarbanes-Oxley created 16)
• 94 reports
• 88 hearings held on Dodd-Frank during the Act’s passage and first year of implementation
• 67 studies required by Dodd-Frank (Sarbanes-Oxley required 6)
• 44 Republican Senators who have vowed to block any candidate for director of the CFPB
• 13 new federal government agencies created by Dodd-Frank

As Dodd-Frank rolls into its second year, much remains to be seen, but what is clear is that the numbers will continue to increase. The implementation costs will continue to rise, the agencies will hand down more and more regulations, and Members of Congress will introduce even more bills to scale back the Act. At this rate Dodd-Frank itself may be getting too big to fail.

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In her last act before leaving Washington this week, Elizabeth Warren, Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau, testified before the House Oversight and Government Affairs Committee, while the Senate Committee on Banking, Housing and Urban Development also took on the CFPB in its own hearing. At both hearings, Republicans made it clear that they are concerned about the bureau’s lack of accountability. Many reiterated the Republican leadership’s promise to block any nominee for director until the bureau’s management is restructured.

On July 14, Elizabeth Warren testified before the House Committee on Oversight and Government Affairs in a hearing entitled, “Consumer Financial Protection Efforts: Answers Needed.” Twenty-seven Members of the 40-member committee attended the four-hour hearing and questioned Ms. Warren on issues ranging from her vision for the bureau to its budget and oversight authority.

Throughout the hearing, the committee was visibly polarized. On one side, Republicans, led by Committee Chairman Darrell Issa (R-CA), argued that the bureau needs significantly more Congressional oversight and also needs to do more to preserve personal liberty, giving the American people the ability to make financial choices for themselves, rather than forcing them toward “what’s best for them.” On the other side, Democrats, headed by Ranking Member Elijah Cummings (D-MD) insisted that the CFPB is as accountable as any other financial regulator and said that the issue is a matter of putting consumers’ interests above those of big Wall Street banks.

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Blank Rome joins the Loan Syndications and Trading Association (LSTA) and Morrison & Foerster to present a program on “The Impact of Dodd-Frank on the Loan Market: Broad Principles and Practical Implications” on July 12, 2011.

Blank Rome partners, J.C. Boggs and Marianne Caulfield, join the panel to discuss:

• Dodd-Frank one year later, the current state of play on the Hill and the regulatory agencies
• Major regulatory activities of interest to the loan trading market (Volcker, derivatives, capital and risk management)
• Dodd-Frank and the Loan Market: The Future of CLOs, Derivatives and Loan Participations
• How Dodd-Frank derivatives  rules affect risk participations (including LMA funded participations) and what alternatives are available

This presentation will be held:

July 12, 2011
4:00 p.m.–6:00 p.m.
Morrison & Foerster LLP, 2000 Pennsylvania Avenue, NW, Washington, DC

To register, please click here. 

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As the July 21, 2011 Dodd-Frank implementation date rapidly approaches, it is becoming increasingly likely that the Bureau of Consumer Financial Protection will not have a Senate-confirmed director by the time its new authority begins. While some have tried to downplay the significance of the CFPB assuming authority without a director, it could seriously hinder the bureau’s ability to do so much as open its doors, let alone effectively regulate.

According to Title X of Dodd-Frank, the director is appointed by the President with the advice and consent of the Senate. Once confirmed, the director serves as the sole head of the CFPB. Dodd-Frank enumerates the director’s responsibilities clearly: appointing and directing all bureau employees; establishing all offices within the bureau; reporting to Congress; submitting budget requests to the Federal Reserve; requiring reports of covered firms; and prescribing rules and issuing orders and guidance, among others.

Additionally, there are a number of responsibilities assigned to “The Bureau,” though Dodd-Frank does not establish who has authority over The Bureau, if not the director. Assuming a case can be made for some other leadership structure, however, The Bureau is tasked with exclusively enforcing federal consumer financial law. The Bureau also may take action against those participating in unlawful acts, engage in joint investigations, conduct hearings and adjudication proceedings, and commence civil action against those who violate federal consumer financial law.

While this would suggest that The Bureau would have some capabilities absent a director, it may not be quite that easy. First, Dodd-Frank at times fails to clearly delineate where the exclusive authority of the director begins and ends as opposed to The Bureau as a whole. While this could arguably help The Bureau perform its duties without a director, there’s a second, stickier problem. The director has the sole authority to staff The Bureau, as well as to request and budget funding from the Federal Reserve. Consequently, even if The Bureau could find the statutory authority to perform some regulatory functions, it would be hard-pressed to do so without funding or personnel.

If a director is not confirmed by July 21, Dodd-Frank permits two courses of action. First, the Secretary of the Treasury may submit a request to Congress to delay the implementation date. The law requires that implementation cannot be delayed for more than 18 months, meaning that the Administration would only gain 6 months to get a nominee confirmed. Alternatively, Dodd-Frank states that the Secretary of the Treasury is authorized to perform the functions of The Bureau until the director is confirmed by the Senate, though it is unclear whether this authority expires on July 21.

Secretary Geithner has not yet announced plans to take either of these steps, but with only a month to go and Republicans in the House and the Senate vowing that they will go to any means necessary to block the confirmation of presumptive nominee Elizabeth Warren, delaying the implementation may be the Secretary’s only option.
 

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After an oh-so-close loss in the Senate last week, the banking industry is now planning to take the fight over debit card interchange fees to court.

The Federal Reserve has yet to issue a finalized rule, but once it does, the banking industry is likely to file suit, claiming that the Fed has misinterpreted the Dodd-Frank Wall Street Reform and Consumer Protection Act. The industry claims that the so-call Durbin Amendment, which imposed the cap, allows banks to make a “reasonable and proportional” profit. The industry also claims that the Fed is not taking into account the various costs associated with operating a debit card network.

Minnesota-based TCF National Bank sued the Federal Reserve in October 2010, challenging the constitutionality of the rule. The first hearing is set for this week.

Under the Dodd-Frank Act, debit card fees, which currently average about 44 cents per transaction, are capped at about 12 cents per transaction. Sens. Tester (D-MT) and Corker (R-TN) introduced an amendment that would have delayed the implementation of the fee cap, but it failed to pass the Senate by a six vote margin. The final count was 54-45, with 60 votes needed for passage.
 

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What a difference a year makes. In July 2010, one year seemed to be a perfectly reasonable timeframe for regulators to develop more than 150 rules, conduct 47 studies, create several new government offices, and engage in extensive hiring and agency reorganization. With the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act rapidly approaching, however, it is becoming increasingly clear that more time will be necessary in order to implement the financial reform law’s sweeping provisions.

In particular, when it comes to derivatives regulations, it appears that Congress bit off more than either the CFTC or SEC could chew. On Friday, the SEC announced that it would delay implementation of some of the new derivatives regulations that were set to take effect next month, while the CFTC voted on Monday to delay certain swaps rules until Dec. 31, 2011, in anticipation of missing the July deadline for completing the rules.

SEC officials said they are taking the additional time to ensure the clarity of the new rules and minimize market disruption. However, some lawmakers on Capitol Hill believe that such delays—which have yet to be specified—may cause as much disruption by preventing market participants from planning accordingly.

On Friday, House Agriculture Committee Chairman Frank Lucas (R-OK) sent a letter to CFTC Chairman Gary Gensler calling on regulators to reduce market uncertainty by clarifying various definitions, including the definition of a swap, which becomes effective on July 16, though it has yet to be finalized. The CFTC and SEC have recourse under a provision in Dodd-Frank to delay implementing regulations for no more than 60 days after they are finalized.

Delays and missed deadlines are certainly not exclusive to the SEC and CFTC. More broadly, as of June 1, of the 87 total studies required under Dodd-Frank, 24 have been completed and two deadlines have been missed. Of the 385 total rulemakings required, 115 have been proposed, 24 have been finalized and 28 deadlines have been missed. With 17 studies and 109 rulemakings due in July 2010 alone, the coming month will be the true test of regulators’ progress—and it is a test they are not likely to pass.

DOWNLOAD:  CFTC Swap Regulation Factsheet (PDF)

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The attempt to delay the implementation of the “Durbin Amendment” – Sen. Richard Durbin’s (D-IL) amendment to the Dodd Frank Act that would cap what banks can charge for debit card interchange or “swipe fees” –failed to collect the 60 votes needed in the Senate this afternoon. Sponsored by Sens. Tester (D-MT) and Corker (R-TN), the amendment fell short by six votes -- the final count was 54-45.

Currently, swipe fees average 44 cents per transaction and generate more than $12 billion annually for financial institutions. Under the new Dodd-Frank framework, the fees would be capped at 12 cents per transaction starting on July 21, 2011 (the one-year anniversary of Dodd-Frank’s enactment).

The swipe fee debate has pitted banks against retailers and forced many in Congress to choose among friends. Banks have insisted that the current swipe fees are necessary to pay for security and consumer protections included with these transactions and to keep other banking fees low. Retailers have countered that the high fees force them to raise prices and are hurting small retailers. With Fortune 50 companies on both sides, both the banks and the retailers launched considerable lobbying efforts.

Though the retailers prevailed by a narrow margin, the banks did pick up some unlikely support. The Durbin amendment passed last year by a vote of 64-33. Of the 56 members still in the Senate who originally voted with Sen. Durbin, only 45 Senators today voted in support of Durbin’s position. The Tester-Corker amendment picked up eight cosponsors yesterday, four of whom voted for the Durbin Amendment last year: Sens. Michael Bennet (D-CO), Chris Coons (D-DE), Kay Hagan (D-NC) and Mike Crapo (R-ID). The Senators said they changed their positions due to concern over the Durbin amendment’s impact on small banks. Even more surprising, House Financial Services Committee Ranking Member Barney Frank (D-MA) announced this morning that he supports the Tester-Corker amendment and believes that the interchange fee cap requires further study.
 

Sen. Corker said it is unlikely that the Senate will address this matter again during this Congress. Meanwhile, several states, including Minnesota, Maine, Massachusetts and Rhode Island, are currently considering bills that would give retailers the authority to choose which cards to accept based on the cards’ associated fees.

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On Thursday, all 10 Republican members of the Senate Banking, Housing and Urban Affairs Committee—led by Sen. Bob Corker (R-TN)—wrote a letter to committee chairman Tim Johnson (D-SD) urging him to “hold hearings and a mark-up as soon as reasonably possible on legislation to establish an accountable governance structure for the Bureau of Consumer Financial Protection.”

This latest action follows a May 2 letter signed by 44 Senate Republicans to President Obama that threatened to block any CFPB director nominee—regardless of party affiliation—unless appropriate accountability mechanisms for the CFPB are addressed by Congress. In both instances, Senate Republicans are calling for the adoption of three specific CFPB reforms, including:

1. altering the CFPB’s leadership structure from that of a single director to a board of directors, similar to the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, or Securities and Exchange Commission (SEC);
2. subjecting the CFPB to the congressional appropriations process; and
3. providing prudential bank regulators with stronger tools to prevent CFPB regulations that may impact the safety-and-soundness of banks.

The tactic is clearly an attempt to force the hands of President Obama and Senate Democrats by using the confirmation process as a leverage point. Unless President Obama chooses to circumvent the Senate confirmation process through a recess appointment—a move deemed by many as politically controversial—he and Chairman Johnson will be forced to recognize many of the Senate GOP’s demands for CFPB reform. The House Financial Services Committee has already passed three bills that nearly mirror the Senate proposals.

Also in the House, senior House Financial Services Committee member Carolyn Maloney (D-NY) has circulated a “Dear Colleague” letter requesting that House members sign a letter to President Obama urging him to appoint Elizabeth Warren to the CFPB director position during one of the upcoming congressional recesses.

“Since Republican senators have said that no one is acceptable unless the law is weakened, we would urge you to nominate Professor Warren as the CFPB’s first director anyway,” says Maloney’s letter to President Obama.
 

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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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The Obama administration’s February report that outlined a series of near-term and long-term proposals for reforming Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac provided a starting point for Congressional debate—and now House Republicans appear ready to act.

This afternoon, Republicans on the House Financial Services Committee held a press conference to unveil eight separate proposals for providing near-term reforms to Fannie and Freddie. Several of the GOP proposals mirror those made by the Obama administration, including an increase in Fannie and Freddie’s guarantee fees and a winding down of both GSE’s investment portfolios, which currently hover around $1 trillion. Of particular significance, however, is the GOP’s omission of a long-term proposal for replacing Fannie and Freddie, highlighting the difficulty in significantly decreasing the GSE’s outsized role in the U.S. housing finance market.

Below is a summary of each GOP proposal: 

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Coinciding with Elizabeth Warren’s inaugural testimony before Congress in her capacity as Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau (CFPB) on Wednesday, House Financial Services Committee Chairman Spencer Bachus (R-AL) revived a dormant proposal that would decentralize the leadership of what Bachus calls the “most powerful agency that’s ever been created in Washington.”

Joined by 26 GOP colleagues, Bachus introduced H.R.1121, the Responsible Consumer Financial Protection Regulations Act, legislation that would replace the position of CFPB Director with a five-member Commission consisting of members that are nominated by the President and confirmed by the Senate. In addition, H.R. 1121 requires the commission to be comprised of no more than three members of the same political party—a bipartisan structure similar to that of the FTC, FDIC and SEC. According to Bachus, Dodd-Frank consolidates too much authority in the hands of a single CFPB director.

The commission structure—an idea first proposed in Congress by former Rep. Walt Minnick (D-ID) during the initial stages of the Dodd-Frank debate in 2009—has long been under discussion on Capitol Hill and was ultimately included within the financial reform legislation that first passed the House in December of 2009. (The commission language was ultimately scrapped during the House-Senate conference negotiations.)

Although no Democrats have signed onto H.R. 1121 thus far, House Republicans view the commission proposal as perhaps the most palatable CFPB reform option for Congressional Democrats, who have remained unified in resisting recent GOP efforts to slash the agency’s budget.

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Led by House Financial Services Committee Chairman Spencer Bachus (R-AL), 34 of the committee’s Republicans sent a letter to the six agency heads charged with implementing the Dodd-Frank Act stating that the members are “troubled by the volume and pace of rulemakings” under the Act. Citing the sheer number of rules, the diverse array of issue areas, and the truncated comment periods, the members are concerned that businesses and consumers will not have adequate opportunity to provide meaningful input into the process. The current comment periods are averaging 30-45 days as opposed to the typical 60 day periods that agencies usually allow for significant rules. The rushed time frames also cause the lawmakers to worry that the “consistency of rules across agencies” will be compromised and that the rules will not contain adequate regulatory flexibility for small businesses. The letter poses eight detailed questions to the financial regulators – the Treasury, Federal Reserve, Commodity Futures Trading Commission, Securities and Exchange Commission, Federal Deposit Insurance Corporation, and Comptroller of the Currency – and asks for their responses no later than March 25, 2011.

Click here for the full text of the letter.

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In an abrupt and somewhat anti-climactic fashion, House and Senate Congressional leadership temporarily averted the first government-wide shutdown since 1996 this week, agreeing to a two-week extension of a Continuing Resolution (CR) that will fund government operations through March 18.

With recent public polls showing that neither Democrats nor Republicans would benefit from a protracted budget stalemate, the White House is now ramping up its engagement, as Vice President Joe Biden and Congressional leaders are in the middle of behind-the-scenes negotiations to hammer out a long-term agreement to fund government operations for the remaining seven months of Fiscal Year 2011.

The recent budget deal and the White House’s active engagement may provide relief to some of the roughly 2 million civilian employees on Uncle Sam’s payroll, but don’t tell that to the folks at the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Despite substantial new regulatory responsibilities granted to the agencies under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), both the SEC and CFTC budgets for FY11 and FY12 are under attack.

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The House Financial Services Committee (HFSC) appears primed to strike the first blow against the Obama administration’s nearly two-year effort to mitigate U.S. home foreclosures through its signature Home Affordable Modification Program (HAMP). During a markup this morning, Chairman Spencer Bachus (R-AL) said a final committee vote will occur next week to terminate the program he argues is doing “more harm than good for struggling homeowners.”

Created in March of 2009, HAMP aims to assist struggling homeowners avoid foreclosure by providing federal incentives for borrowers, servicers and investors to modify delinquent home loans through interest rate reductions, mortgage term extensions, and temporary principal forbearance. Although the Obama administration’s initial goal was to permanently modify three to four million home loans, HAMP has led to only 600,000 permanent modifications. According to newly-released Treasury statistics, between April 2009 and the end of January 2011, 1.5 million HAMP trial modifications were initiated – meaning that well over half of all initial modifications have resulted in failure.

Although HAMP was originally provided nearly $30 billion under the Troubled Asset Relief Program (TARP), as of February, only $1.04 billion in incentive payments have been disbursed to mortgage servicers under HAMP, according to the Congressional Research Service.

Critics of HAMP often cite an October 2010 report from the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) asserting that failed loan modifications under the program have led to higher outstanding principal, less home equity, and worse credit score for some participating troubled borrowers. Critics have also noted that no enforcement mechanisms are in place for servicers who violate the HAMP guidelines, largely due to the program’s voluntary nature.

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Entitled "The Effect of Dodd-Frank on Small Financial Institutions and Small Businesses,” Wednesday afternoon’s hearing before the House Financial Services Subcommittee on Financial Institutions & Consumer Credit was intended to provide a venue for banking industry leaders to decry the oft-maligned Consumer Financial Protection Bureau (CFPB) and other potential regulatory hurdles stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173).

Interchange fees, however, appeared to be all banking industry leaders wanted to talk about—providing the latest signal that the Congressional debate over the controversial “Durbin Amendment” is far from over.

In 2010, the National Association of Federal Credit Unions (NAFCU), the Independent Community Bankers of America (ICBA) and other influential banking industry groups waged a full-scale—albeit unsuccessful—lobbying effort to strip from the Dodd-Frank legislation an amendment offered by Sen. Richard Durbin (D-IL) that would require the Federal Reserve to enact rules to limit the interchange fees paid by retailers and merchants for the acceptance of debit card payments. Although the Durbin amendment attempted to limit the exposure to credit unions and community banks through the inclusion of an exemption for banks with assets of $10 billion or less, witnesses at Tuesday’s hearing say a proposed rule issued by the Fed in December limiting fees from the current 44-cent average to 7-12 cents per transaction would have a “potentially devastating” effect on small financial institutions and consumers.

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Anecdotally, the Securities and Exchange Commission is receiving one or two "high value" whistleblower tips and complaints a day since the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) statute was signed into law in July 2010. The statute, which enacts sweeping financial regulatory reforms, establishes an expansive whistleblower program. The program provides that a whistleblower, who voluntarily gives “original information” to the SEC that leads to a successful enforcement action with penalties exceeding $1 million, will receive a reward between 10 to 30 percent of the total recovery. To further incentivize whistleblowers, the Act allows for whistleblowers—who can be “any individual,” including corporate insiders, consultants, and service providers—to remain anonymous and cooperate with the SEC through an attorney. The Act also provides robust anti-retaliation protections, which permit federal lawsuits for wrongful termination, suspension, harassment, or other discrimination resulting from the whistleblower’s reporting to the SEC.

In enacting this whistleblower program, Congress sought “to motivate those with inside knowledge to come forward and assist the government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.” But, how does this expanded SEC whistleblower program impact corporate compliance programs, many of which were enacted to combat bribery and corruption in the wake of Sarbanes-Oxley?

Last November, the SEC proposed regulations to implement Dodd-Frank. Although the proposed rules make clear that they are not intended to discourage corporate whistleblowers from first availing themselves of their company’s compliance program, many companies nonetheless fear that the average employee has little or no incentive to provide his or her employer with an opportunity to investigate, and, if necessary, correct and self-disclose alleged wrongdoing. Doing so, after all, likely would eliminate that employee’s prospects of receiving a significant award.

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In the political heat of the 2010 Congressional debate over the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), Republicans in both the House and Senate offered up amendments that would have eliminated the federal government’s $150 billion support of the beleaguered housing giants, Fannie Mae and Freddie Mac, and would have led the two Government-Sponsored Enterprises (GSEs) on a speedy path to full privatization.

In 2011, with a new House majority and the Financial Services Committee (HFSC) gavel in hand, the GOP and its previously-offered proposals for reigning in Fannie and Freddie—which collectively guarantee or own an estimated 50 percent of all new U.S. home mortgages—do not appear as simple or clear-cut in practice.

At the heart of the questions raised at this morning’s HFSC hearing over the Obama administration’s newly-released proposals for GSE reform were what the federal government’s long-standing role in the housing finance system should be and how a diminished federal role will affect U.S. homeownership, consumer access to credit, support for low-income communities, and a still-fragile U.S. housing market.

Providing testimony was Treasury Secretary Timothy Geithner, who relayed the Obama administration’s hope that Congress can approve legislation within the next two years to dismantle Fannie and Freddie over an extended timeframe and slowly shift the mortgage credit industry closer to the private market. Geithner cautioned against Congress moving too slowly or too quickly, stating that either move could further destabilize the U.S. housing market and potentially disrupt the broader economic recovery.

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Resolving a Federal budget impasse that threatens the first government-wide shutdown since 1995 will undoubtedly be Congress’s top priority when it returns on Monday following a week-long President’s Day recess. But who says lawmakers can’t walk and chew gum at the same time? Below is a preview of next week’s critical financial services hearings on Capitol Hill, as both chambers continue to oversee the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and discuss various proposals for reforming the housing finance sector.

GSE Reform

Treasury Secretary Timothy Geithner will make his first appearance of the year before the full House Financial Services Committee (HFSC) on Tuesday to discuss the Obama Administration’s long-awaited report to Congress—unveiled on February 11—that details both short-term administration initiatives and long-term options for reforming Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. House Republicans have targeted GSE reform as a key agenda item for the 112th Congress, as the HFSC has already conducted three separate hearings related to housing finance this Congress.

In addition, HFSC Chairman Spencer Bachus (R-AL) announced yesterday that his committee will be marking up four separate bills that will seek to terminate Obama administration foreclosure and housing assistance programs that Bachus argues are “doing more harm than good for struggling homeowners.” The Home Affordable Modification Program (HAMP), the Neighborhood Stabilization Program, the FHA Refinance Program, and the Emergency Homeowner Relief Program would all be terminated under the GOP proposals.

Republicans have been particularly critical of HAMP, a program spearheaded in March of 2009 by the Obama administration to assist struggling homeowners avoid foreclosure by providing federal incentives for borrowers, servicers and investors to modify delinquent home loans. HAMP has led to over 500,000 permanently modified home loans, yet has fallen far short of the Obama administration’s initial goal of 3 to 4 million modifications.

Consumer Financial Protection Bureau (CFPB)

On Wednesday, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit – chaired by West Virginia Republican Shelley Moore-Capito – will conduct a hearing entitled "The Effect of Dodd-Frank on Small Financial Institutions and Small Businesses.” The CFPB’s potential impact on U.S. job creation and commercial credit access are likely to dominate the discussion.

The hearing follows the House’s passage on February 19 of a Continuing Resolution (CR) – a bill to fund government operations through September 30, 2011—that would cap the Federal Reserve’s funding for the CFPB at $80 million, representing a steep cut from the $134 million the White House requested for the agency’s FY11 start-up costs. Under the Dodd-Frank legislation, once the CFPB is officially established in July 2011, its funding will derive from the Federal Reserve’s operating expenses budget and could be as high as $500 million in FY12.

During the House budget debate, Chairwoman of the Appropriations Subcommittee on Financial Services Jo Ann Emerson (R-MO) defended the hefty cuts. "Providing half a billion dollars a year without any congressional oversight to the bureau is, I believe, a very irresponsible abdication of a constitutional check and balance," said Emerson.

Derivatives

Newly-minted Chairwoman of the Senate Agriculture, Nutrition and Forestry Committee, Debbie Stabenow (D-MI) will hold a hearing on Thursday to review agency implementation of Dodd-Frank’s provisions related to the regulation of over-the-counter swaps markets.

The hearing will primarily focus on Dodd-Frank’s imposition of enhanced regulatory requirements on the derivative market and its participants, including a requirement for stringent margin and capital requirements for all derivative market participants. During a HFSC oversight hearing on February 15, Commodity Futures Trading Commission Chairman Gary Gensler attempted to alleviate lawmaker and industry concerns that the new derivatives regulations will negatively impact so-called commercial “end-users” – those businesses ranging from farm equipment manufacturers to breweries -- who seek to hedge against interest rates and raw material prices through derivatives contracts. Gensler testified that the CFTC, which has been given broad leeway in determining the businesses who will be exempted under the law, does not intend to target legitimate commercial end-users.

Stay tuned for hearing updates next week.
 

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On February 11, 2011 the Obama Administration delivered a report to Congress that provides a path forward for reforming America’s housing market. The Administration set forth a plan to wind down Fannie Mae and Freddie Mac in order to shrink the government’s current role in housing finance in a timely matter. The Administration’s plan focuses on bringing private capital back to the market through a number of different measures including:

• Phasing in increased pricing at Fannie Mae and Freddie Mac to make room for private capital
• Reducing conforming loan limits
• Phasing in a 10 percent down payment requirement
• Winding down Fannie Mae and Freddie Mac’s investment portfolios
• Returning the Federal Housing Administration (FHA) to its traditional role to ensure that the private sector, so that when Fannie Mae and Freddie Mac’s presence in the market shrinks, the private sector, not FHA, picks up the new market share.

The Administration also proposed three possible courses for long-term reform:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers.

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis.

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.

Click here to read the full report or the Treasury press statement.

Reforming America's Housing Finance Market: A Report to Congress (PDF)

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DealFlow Media’s 2nd Annual Activist Investor Conference
New York City
January 27, 2011
9:00 a.m.-9:50 a.m.

Keith E. Gottfried, partner in Blank Rome's shareholder activism group, will be speaking on a panel at DealFlow Media’s 2nd Annual Activist Investor Conference on "The Impact of the Dodd-Frank Bill on Corporate Governance" on Thursday, January 27, 2011, from 9:00 a.m. to 9:50 a.m. at the Westin Times Square in New York City.

Mr. Gottfried's panel will discuss the Dodd-Frank legislation—including the changes it has created in the regulatory landscape—and its vast and evolving importance for activists and other investors. The panel will also examine how new rules bring new responsibilities, and liabilities, to management and directorships.

DealFlow Media is the publisher of the Activist Investor Alert and its 2nd Annual Activist Investor Conference, held January 27 and 28, brings together corporate managers, investors, proxy advisors, and legal representatives from all sides for a 360 degree view of activist investment strategies and their impact on corporate performance and returns. The event examines topics vital to both investors and corporate boards, including the following panel presentations:

• A Review of the Objectives and Tactics of Hedge Fund Activists
• Responding to Investor Activism: Running a Successful Proxy Response Campaign
• Valuations & the Cost of Investing: Are Stocks Still Cheap?
• Assessing the Vulnerability of a Board of Directors
• Case Studies: Examining Campaigns against Nabors, Abercrombie & Fitch and Dell
• Proxy Fights in Canada: Activism North of the Border
• Executive Compensation: How Much is Enough?
• The Perils of Being a Lone Dissident Board Member
• Retail Investor Targeting
• Who Wants to Be an Activist Millionaire?
• Closed End Fund Activism
• The Poison Pill: Examining Successful Corporate Defenses Using Good Corporate Governance to Affect Your Strategy

More information about DealFlow Media’s 2nd Annual Activist Investor Conference is available at www.dealflow.com/activist.

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The results of the 2010 mid-term elections are now in, meaning it’s time to begin analyzing what a new Republican House majority and a more narrowly divided Democratic Senate majority will represent for financial reform efforts in the 112th Congress.

Speaking to reporters this morning, House Minority Leader and likely the next Speaker of the House, John Boehner (R-OH), appeared to tone down previous calls by him and fellow GOP colleagues for a repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act, instead expressing his caucus’s intention to begin closely scrutinizing the implementation of the sweeping financial reform legislation through aggressive oversight. The GOP is expected to focus its sights on the following—the newly-created Consumer Financial Protection Bureau (CFPB); FDIC resolution authority that allows the agency to wind down failing financial institutions; and new rules governing financial derivatives. Republican gains in both the House and Senate will almost assuredly nix President Obama’s ability to usher through the Senate a potential nomination of Elizabeth Warren as a permanent director of the CFPB.

Despite the GOP’s renewed focus on overseeing and potentially repealing certain provisions of Dodd-Frank, a Democratic-controlled White House and Senate will still significantly hamper Republicans’ ability to pass any broad or sweeping changes. The most viable tool at Republicans’ disposal will be the power of the purse, as attempts could be made to prevent Dodd-Frank’s implementation through the withholding of federal appropriations to certain agencies. However, from a political standpoint, it remains to be seen whether the new House majority will risk being viewed by the electorate as proponents of Wall Street deregulation when looking ahead to 2012.

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Perhaps no section of the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act is more controversial on both Capitol Hill and within the financial industry than that which creates an independent Consumer Financial Protection Bureau (CFPB)—and according to the outgoing Senate Banking Committee Chairman, until the President nominates and the Senate confirms a permanent CFPB director, the entire bureau may be at risk in the next Congress.

“Look, this was a controversial section of the bill—don’t have any illusions,” said Chairman Christopher Dodd (D-CT) in reference to the CFPB during a Banking Committee hearing yesterday that received testimony from the heads of the various financial regulatory agencies. “Regardless of the outcome of the election in November, there are going to be people trying to get rid of this bureau, and it’s going to be a lot easier to get rid of it if it hasn’t gotten up and gotten started demonstrating the value and importance of it. So it’s at risk in my view, until we get someone in running the place and demonstrating what it can do and the kind of rules it’s going to develop.”

President Obama’s decision on September 16 to temporarily appoint Elizabeth Warren as "special adviser" to the President and the Treasury Secretary for standing up the CFPB has failed to appease Chairman Dodd, who has repeated such ominous warnings to the administration over the past few months. When taking the newly emboldened GOP and their recent rhetoric into account, Dodd’s sentiments don’t appear to be overstated.

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Treasury Secretary Tim Geithner announced this morning that the newly-created Financial Stability Oversight Council (FSOC) will hold its inaugural meeting on October 1 at the U.S. Treasury Department.

A centerpiece of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173), the FSOC consists of the nation’s top financial regulators and is charged with identifying and responding to systemic risks posed by large and interconnected bank holding companies and non-bank financial companies to the broader U.S. financial system. Proponents of the legislation believe that the FSOC’s broad oversight authority is necessary in order to eliminate the reoccurrence of “too-big-to fail” in the U.S. financial and political arenas.

Geithner, who will serve as the FSOC chairperson, will be joined in the meeting by seven voting members and three non-voting membership. Conspicuously absent from the list is Elizabeth Warren, who is serving in her new role as “Special Advisor” to the White House to help stand-up the Consumer Financial Protection Bureau (CFPB), and who presumably, cannot participate in the FSOC without the formal title of CFPB Director. Once a CFPB director is nominated and confirmed by the Senate, he or she will be voting member of the FSOC as pursuant to H.R. 4173. The law also states that the FSOC will meet at least on a quarterly basis.

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Seeking to avoid a bruising confirmation battle in the Senate, President Obama appears poised to create a post for consumer advocate Elizabeth Warren in which she would guide the creation of the new Consumer Financial Protection Bureau (CFPB). By making her a "special adviser" to the President and the Treasury Secretary, the President would avoid having to send Warren's name to the Senate for confirmation as the head of the CFPB. This end-run around the Senate is likely to cause consternation on both sides of the aisle. Whether the GOP takes over the Senate or not, the Senate Banking Committee is likely to keep a very close eye on Ms. Warren's activities. Numerous hearings and requests for information could well be in her future. Taking this post would complicate her chances of ever becoming the permanent head of the bureau, as the Senate would not likely be disposed to ratify this approach to installing leadership there. So this may be an effort by the Administration to reward her for her initiative in pushing for the bureau before they give the job to someone who is confirmable.

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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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On July 16, 2010, Blank Rome presented a webinar on The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010.

This legislation will affect everyone, from financiers working on Wall Street to publicly-traded companies in all industries to consumers on Main Street. To view a video presentation of the topics discussed during the webinar please click on the individual links below.

The Blank Rome team addressed the following provisions of the financial reform bill:

• Political Overview—the Evolution of the Financial Reform Legislation
• Executive Compensation and Shareholder Rights—New Rules for "Say-on-Pay" and Independent Compensation Committees
• New Rules for Banks and Derivatives—Capital Requirements, Bank Fees and "the Volcker Rule", Central Clearing and Trading, Increased Market Transparency, and Regulating Foreign Exchange Transactions
• Hedge Funds—SEC Registration, Providing Systemic Risk Data, and Expanded State Supervision
• Funeral Plans and Restructuring—Periodic Reporting for Rapid Shutdown and the Consequences of Non-Compliance
• Questions and Answers

To download a PDF copy of the presentation, please click here.

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To download the final, enrolled version of the Dodd Frank Wall Street Reform and Consumer Protection Act, please click here.
 

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Earlier today, President Obama signed into law the Dodd Frank Wall Street Reform and Consumer Protection Act—marking the completion of the legislative road and the beginning of the regulatory road for the financial reform bill that is now the law of the land.

In his remarks at the bill signing, the president thanked congressional leaders, praised the effort, and described the package as a "...set of reforms to empower consumers and investors, to bring the shadowy deals that caused this crisis into the light of day, and to put a stop to taxpayer bailouts once and for all."

The 2,300 page bill now falls into the hands of the Treasury Secretary and other financial regulators to execute. In the coming days and weeks, Financial Reform Watch will be "watching" for many things including whom the president nominates to be the head of the new Consumer Financial Protection Bureau; when the first meeting of the Financial Stability Oversight Council will be scheduled; and which proposed rules begin to flow from the financial regulators tasked with implementing the mandates of the Dodd Frank Act.

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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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As expected, the Senate voted 60-38 this morning to invoke cloture on the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) conference report, setting up a final vote that is slated to occur around 2 p.m.

Republican Senators Scott Brown (MA), Olympia Snowe (ME) and Susan Collins (ME) joined all but one Senate Democrat – Wisconsin Senator Russ Feingold – in voting to invoke cloture. Senator Chuck Grassley (R-IA), the only other Republican to support H.R. 4173 in May, switched his vote to “no” due to concerns over the derivatives language, along with the spending offsets that were included during the later stages of negotiations.

Following the expected final passage of H.R. 4173 this afternoon, the bill will then be sent to President Obama, who will likely sign it into law sometime next week.
 

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Date:  Friday, July 16

Time:  12:00 noon - 1:30 p.m. EST

Cost:  Free

Registration: Click here to register by July 15

Please join the Financial Reform Watch Team for a free webinar covering the key provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 :

• Political Overview—the Evolution of the Financial Reform Legislation
• Executive Compensation and Shareholder Rights—New Rules for "Say-on-Pay" and Independent Compensation Committees
• New Rules for Banks—Capital Requirements, Bank Fees and "the Volcker Rule"
• Hedge Funds—SEC Registration, Providing Systemic Risk Data, and Expanded State Supervision
• Derivatives—Central Clearing and Trading, Increased Market Transparency, and Regulating Foreign Exchange Transactions
• Funeral Plans and Restructuring—Periodic Reporting for Rapid Shutdown and the Consequences of Non-Compliance

For more information, please contact Alexandra Sevilla at [email protected]

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Date:  Friday, July 16

Time:  12:00 noon - 1:30 p.m. EST

Registration: Click here to register by July 15

The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 brings the most ambitious reform to the financial industry in 70 years. This legislation will affect everyone, from financiers working on Wall Street to publicly traded companies in all industries and to consumers on Main Street.

Join the Financial Reform Watch team for a complimentary webinar that will address the overall provisions of the financial reform bill, including:

• Political Overview—the Evolution of the Financial Reform Legislation
• Executive Compensation and Shareholder Rights—New Rules for "Say-on-Pay" and Independent Compensation Committees
• New Rules for Banks—Capital Requirements, Bank Fees and "the Volcker Rule"
• Hedge Funds—SEC Registration, Providing Systemic Risk Data, and Expanded State Supervision
• Derivatives—Central Clearing and Trading, Increased Market Transparency, and Regulating Foreign Exchange Transactions
• Funeral Plans and Restructuring—Periodic Reporting for Rapid Shutdown and the Consequences of Non-compliance

For more information, please contact Alexandra Sevilla at [email protected]

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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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The Fourth of July deadline for enacting financial regulatory reform legislation is likely to be postponed, yet again, to the middle or end of July. The House and Senate conference committee completed its work on the Dodd Frank bill in the wee hours of last Friday morning, but the death of Sen. Robert Byrd (D-WV) and the objections of four Senate Republicans are forcing the conference committee back into session this afternoon.

Senate Democratic leadership is now struggling to find the 60 votes necessary to overcome a filibuster. Sen. Byrd was a reliable “yes” vote for the conference report, and his replacement is not expected to be sworn in for at least several weeks. The four Republican Senators who had earlier supported the Senate bill are now likely to oppose the conference report -- Scott Brown (MA), Susan Collins (ME), Charles Grassley (IA), and Olympia Snowe (ME). Sen. Brown yesterday sent a letter to Conference Chairmen Dodd (D-CT) and Frank (R-MA) explaining that he was withdrawing his earlier support of the measure due to the addition of an FDIC assessment on large banks and hedge funds that was inserted at the last minute in order to raise the $18 billion necessary to make the legislation budget-neutral. Senators Snowe and Collins have also expressed reservations about the addition of this provision, and Sen. Grassley is facing additional constituent pressure being generated around a difficult primary challenge that may cause him to reconsider his earlier support.

Of the two Senate Democrats who voted against the bill last time – Senators Russ Feingold (D-WI) and Maria Cantwell (D-WA) – Sen. Feingold continues to oppose the legislation and Sen. Cantwell remains undecided. The leaders are holding today’s conference meeting in an effort to find alternative means to pay for the shortfall and make the bill budget neutral. House Financial Services Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd have now proposed to raise the FDIC reserve ratio to 1.35 and divert unused TARP funds to replace the current $18 billion assessment. Of course, the new solution may well alter the support of other Senators.

Paying tribute to Senator Byrd, resolving the assessment issue, lining up the votes, and getting through significant procedural requirements in time to get members of Congress home for their Independence Day events now appears unlikely if not impossible.

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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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Beginning at noon tomorrow, House and Senate conferees for the financial reform legislation will return to the negotiating table for round two – this time with their attention fixed on the contentious Title 10, which props up a new regulator for consumer financial protection.

In preparation for tomorrow’s proceedings, House Financial Services Chairman Barney Frank (D-MA) unveiled this afternoon the House’s proposals for amending the Senate language in regards to not only consumer financial protection, but also mortgage reform and predatory lending, and risk retention.

In a critical concession, Frank’s proposal would retain the Senate version’s placement of the newly-created Consumer Financial Protection Bureau (CFPB) inside the Federal Reserve, a move that is likely to provoke disapproval amongst Frank’s Democratic colleagues who favor the creation of a stand-alone agency. Even Frank, himself, panned the idea of housing a new consumer regulator inside the Fed when it was first proposed in the Senate in March. But once again, Frank’s concession largely reflects the political dynamics in the Senate, where the creation of a stand-alone agency would likely unravel a fragile coalition of 60 votes required for passage.

Striking another controversial note, Frank defied long-standing White House objections by reviving language included in the House-passed version and offered as amendment in the Senate by Sen. Sam Brownback (R-KS) – but which did not receive a vote -- that would exempt auto dealers from the CFPB’s regulatory oversight. It remains uncertain whether the White House will continue to lobby against the provision during negotiations this 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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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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Jump-starting what is expected to be two weeks of conference negotiations over the competing House and Senate versions of financial regulatory reform legislation, this afternoon House Financial Services Chairman Barney Frank (D-MA) formally unveiled the first tranche of House proposals that will be considered – beginning on Tuesday at 11 a.m. -- to the base Senate bill.

Although Frank’s proposals are largely technical in nature, some present significant departures from the Senate bill. In particular, Frank is aiming to strike language added by Sen. Al Franken (D-MN) that targets the so-called practice of “rating shopping” by creating an SEC-regulated clearinghouse that would assign a rating agency for newly-created securities. Frank – who joins Senate Banking Committee Chairman Christopher Dodd (D-CT) in opposing the Franken proposal -- is instead offering to insert a provision that calls for a one-year SEC study to evaluate the efficacy of such a clearinghouse; and would charge the SEC with issuing recommendations to Congress.

In addition, Frank has thrown his support behind a House-passed provision that would require SEC registration and examination for private equity fund managers, contrasting with Senate language that provides for a private equity exemption. However, although both House and Senate bills require hedge fund managers to register with the SEC, Frank is proposing to broaden the Senate bill’s exemption for hedge fund managers with less than $100 million in assets to include those with less than $150 million in assets.

Frank’s proposals would amend the following titles (with links to the proposed language), which are the first titles to be considered by the conference committee on Tuesday:

• Title III - Transfer of Powers to the Comptroller of the Currency, the Corporation, and the Board of Governors
• Title IV - Regulation of Advisers to Private Funds and Others
• Title V - National/Federal Insurance Office
• Title IX, Subtitle C - Improvements to the Regulation of Credit Rating Agencies

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The House Leaders just released their lists of conferees who will work on reconciling the House and Senate financial regulatory reform bills.  See below for the complete list.

Democratic Conferees Appointed by Speaker Pelosi (CA) --

Committee on Financial Services
Barney Frank (MA), Chair, full committee
Paul Kanjorski (PA), Chair, Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises
Maxine Waters (CA), Chair, Subcommittee on Housing and Community Opportunity
Carolyn Maloney (NY), Member of Committee
Luis Gutierrez (IL), Chair, Subcommittee on Financial Institutions and Consumer Credit
Mel Watt (NC), Chair, Subcommittee on Domestic Monetary Policy and Technology
Gregory Meeks (NY), Chair, Subcommittee on International Monetary Policy and Trade
Dennis Moore (KS), Chair, Subcommittee on Oversight and Investigations
Mary Jo Kilroy (OH), Member of Committee
Gary Peters (MI), Member of Committee

Democratic Conferees on specific portions of the legislation on which their committees have jurisdiction:

Committee on Agriculture
Collin Peterson (MN), Chair, full committee
Leonard Boswell (IA), Chair, Subcommittee on General Farm Commodities and Risk Management

Committee on Energy and Commerce
Henry Waxman (CA), Chair, full committee
Bobby Rush (IL), Chair, Subcommittee on Commerce, Trade, and Consumer Protection

Committee on the Judiciary
John Conyers (MI), Chair, full committee
Howard Berman (CA), Member of Committee

Committee on Oversight and Government Reform
Edolphus Towns (NY), Chair, full committee
Elijah Cummings (MD), Member of Committee

Committee on Small Business
Nydia Velazquez (NY), Chair, full committee
Heath Shuler (NC), Chair, Subcommittee on Rural Development, Entrepreneurship and Trade
 

Republican Conferees Appointed by Minority Leader John Boehner (OH) --

Spencer Bachus (AL), ranking member on the House Financial Services Committee

Joe Barton (TX), ranking member of the House Energy and Commerce Committee

Sam Graves (MO), ranking member of the House Small Business Committee

Darrell Issa (CA), ranking member of the House Oversight and Government Reform Committee

Frank Lucas (OK), ranking member of the House Agriculture Committee

Lamar Smith (TX), ranking member of the House Judiciary Committee

Ed Royce (CA), member of the House Financial Services Committee

Judy Biggert (IL), member of the House Financial Services Committee

Shelley Moore Capito (WV), member of the House Financial Services Committee

Jeb Hensarling (TX), member of the House Financial Services Committee

Scott Garrett (NJ), member of the House Financial Services Committee
 

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The Senate has appointed twelve of its members to the House-Senate conference committee that will soon meet to resolve the differences between the financial regulatory reform bills that each body has now passed. (Click here for the recently-finalized text of the Senate-passed bill.) The Senate’s list is below along with the list of representatives that House Financial Services Committee Chairman Barney Frank (D-MA) sent to House Speaker Nancy Pelosi (D-CA) as recommended Democratic conferees. Frank explained the rationale behind his choices in a memo to his committee colleagues; essentially, he picked his subcommittee chairs, with the exception of Carolyn Maloney (whom he selected because she was a subcommittee chair until she took over as Chairman of the Joint Economic Committee at the Speaker’s request).

Frank has also floated the following timetable for the conference, but Financial Services Committee Ranking Republican Spencer Bachus (R-AL) sent Frank a letter yesterday expressing concerns that the timetable is too compressed for legislation of this magnitude. In addition, House Republican Leader John Boehner sent a letter to Speaker Pelosi last week asking for a bipartisan and open conference process, but Republicans have yet to name their conferees. FR Watch will update the timetable and conferee list as more information becomes available. --

Frank’s Proposed Conference Timetable

Tuesday, June 8th- House conferees appointed

Wednesday, June 9th- First open meeting of the conference; organizational issues and opening statements only

Tuesday, June 15th through Thursday, June 17th and Tuesday, June 22nd through Wednesday, June 23rd - Conference meets to consider substantive issues

Thursday, June 24th- Conference concludes and conference report will be filed shortly thereafter

Monday, June 28th - House Rules Committee meets to grant rule for floor consideration

Tuesday, June 29th - House passes the conference report; Senate will have three days to pass the conference report before the July 4th recess.

Senate Banking Committee Members appointed as conferees – Dodd (D-CT), Johnson (D-SD), Reed (D-RI), Schumer (D-NY), Shelby (R-AL), Corker (R-TN), Crapo (R-ID), Gregg (R-NH)

Senate Agriculture Committee Members appointed as conferees – Lincoln (D-AR), Leahy (D-VT), Harkin (D-IA), Chambliss (R-GA)

Chairman Frank’s recommended list of House Conferees --

1. Barney Frank (D-MA) – House Financial Services Committee Chairman

2. Carolyn Maloney (D-NY) -- Joint Economic Committee Chairman

3. Paul Kanjorski (D-PA) -- Subcommittee Chairman on Capital Markets, Insurance, and Government Sponsored Enterprises

4. Luis Gutierrez (D-IL) -- Subcommittee Chairman on Financial Institutions and Consumer Credit

5. Maxine Waters (D-CA) -- Subcommittee Chairman on Housing and Community Opportunity

6. Melvin Watt (D-NC) -- Subcommittee Chairman on Domestic Monetary Policy and Technology

7. Greg Meeks (D-NY) -- Subcommittee Chairman on International Monetary Policy and Trade

8. Dennis Moore (D-KS) -- Subcommittee Chairman on Oversight and Investigations
 

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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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 By a vote of 59 to 39, the Senate tonight passed the financial regulatory reform package it has been debating for the past few weeks.  Four Republicans -- Senators Chuck Grassley (IA), Olympia Snowe (ME), Susan Collins (ME), and Scott Brown (MA) -- broke ranks and voted with all but two Democrats to pass the bill.  The two Democrats who voted against the bill were Senators Russ Feingold (WI) and Maria Cantwell (WA).  The next step in the process will be reconciling the House and Senate-passed bills in a conference committee. The White House and Congressional leadership have said they expect to have the legislation ready for the president's signature by the Fourth of July. 

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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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The stalemate is over, and the Senate will begin voting on on amendments to the Restoring American Financial Stability Act of 2010 (S. 3217) this afternoon. As of noon today, there were nearly 100 amendments filed and that number is expected to increase. It is unclear yet which amendments will require 60 votes to pass -- since the possibility of a filibuster constantly looms in the Senate -- but Senate Banking Committee Chairman Chris Dodd (D-CT) cleared six amendments for consideration this afternoon.

The breakthrough occurred earlier today, when Sen. Dodd announced that he and Ranking Member Richard Shelby (R-AL) reached a formal agreement on modifications aimed at ending "Too Big To Fail" – an issue on which Republicans have focused their opposition. GOP Senators have repeatedly argued that the proposed $50 billion "Orderly Liquidation Fund" to help finance the resolution of failing financial institutions would only serve to perpetuate taxpayer-funded bailouts.

According to Dodd, the latest agreement would remove the $50 billion fund and would instead require both creditors and the financial industry to reimburse the government, but only after an FDIC-led resolution occurs. In addition, the agreement includes 1. A "clawback" provision that requires creditors to pay back amounts received under an orderly resolution that exceed the amount the creditors would have received through liquidation or bankruptcy; 2. An authorization for federal regulators to break up institutions that pose a "grave threat to the financial stability of the United States"; and 3. Further limitations on the Federal Reserve’s ability to invoke its emergency 13(3) authority, which allows any individual, partnership or corporation in "unusual and exigent circumstances" to access the Fed's discount window.

Along with the Dodd-Shelby amendment and a Republican proposal that is expected to deal with consumer protection, the Senate will also consider the following amendments this afternoon:

• Senator Barbara Boxer (D-CA) - An amendment specifying that “no taxpayer funds shall be used to prevent the liquidation of any financial company."
• Senator Olympia Snowe (R-ME) - An amendment that strikes language that forces banks to disclose certain customer data; and a second amendment that seeks to maintain credit opportunities for small business owners by preserving their ability to use their homes as collateral.
• Senators Jon Tester (D-MT) and Kay Bailey Hutchison (R-TX) - An amendment requiring the FDIC to implement risk-based assessments in order to charge riskier banks with higher premiums over less-leveraged banks.

With "Too Big to Fail" apparently resolved, the only other speed bumps ahead are derivatives and the consumer financial protection regulator -- both complex and controversial. Financial reform is expected to continue dominating Senate floor time for the remainder of this week, all of next week, and into most of the following week.

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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.

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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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The Senate Democratic leadership asked for the same vote – and they got the same result. Once again, Sen. Ben Nelson (D-NE) joined a unified GOP this afternoon in opposing a motion to begin debating the Restoring American Financial Stability Act of 2010 (S.3217).

 Despite the repeat vote of 57-41, Senate Majority Leader Harry Reid’s (D-NV) strategy of continually putting the GOP on record -- ostensibly as opponents of financial reform legislation -- conveniently coincides with the investigation of a major Wall Street player. This morning, executives at Goldman Sachs received an earful from lawmakers on the Senate Permanent Subcommittee on Investigations who are currently probing Goldman’s trading practices related to toxic mortgage securities.

 Directly following the vote, Senate Banking Committee Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) met at 5 p.m. to continue their negotiations on the divisive areas of the overhaul legislation that continue to stall progress, including new language regulating the derivatives market that has been agreed to by Chairman Dodd and Senate Agriculture Committee Chairwoman Blanche Lincoln (D-AR), along with a $50 billion “Orderly Liquidation Fund” that Democrats say is intended to eliminate the concept of “too big to fail.”

If today feels like Déjà Vu, maybe tomorrow will feel like Groundhog Day, as Senate Majority Leader Harry Reid (D-NV) has already filed a cloture motion that could set up a third vote on Wednesday. Unless a deal is struck by Dodd and Shelby in the next 24 hours, we expect more of the same.
 

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Less than 24 hours after the Senate failed to secure the necessary 60 votes to begin debating financial regulatory reform legislation—and after the electorate woke up to newspaper headlines reading “Financial Overhaul Blocked by GOP” and “Filibuster Stalls Financial Reform Bill”—Senate Majority Leader Harry Reid (D-NV) has announced plans to do it all over again.

At 4:30 p.m. today, the Senate will once again vote on a motion to begin debate on the Restoring American Financial Stability Act of 2010 (S.3217). Although there are currently no indications that the results will be any different—as Senate Banking Committee Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) have yet to agree on a bill that both sides find acceptable—the Senate Democratic leadership is continuing a strategy that aims to portray Republicans as road blocks to Wall Street reform. Appearing determined to turn up the political heat, Reid has also taken steps to set up another vote on Wednesday if necessary.

Stay tuned for the results.

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As predicted by Financial Reform Watch last night, Senate Majority Harry Reid filed cloture today on the motion to proceed to Sen. Dodd’s financial regulatory reform bill (S. 3217). The Senate will vote at 5 p.m. on Monday night whether or not to begin debate on the legislation. If at least sixty Senators—all 59 Democrats plus one Republican—vote yes, then the Senate will begin full consideration of financial reform starting on Tuesday. The debate on the Senate floor could take up to two weeks.

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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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For over a year, financial regulatory reform has taken a backseat to health care. With the passage of the health care bill, financial reform will finally be at the top of the agenda when Congress returns from its two-week spring recess on April 12th. While several Senators, including Republicans Judd Gregg (R-NH) and Bob Corker (R-TN), have said financial reform has an 80 to 100 percent chance of passing, there are still many loose ends to tie before the bill goes to the floor.

On March 22nd, the Senate Banking Committee approved the Restoring American Financial Stability Act of 2010 along a party line vote of 13 to 10, taking up no amendments other than Chairman Dodd’s manager’s package. If Dodd wants to bring a bipartisan bill to the floor, which he has said he does, that work will mostly take place behind the scenes between now and mid-May, when Senate Majority Leader Harry Reid (D-NV) said the bill could receive floor time.

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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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Taking a pivotal step towards the enactment of comprehensive financial regulatory reform, this afternoon Senate Banking Committee Chairman Christopher Dodd (D-CT) released the Restoring American Financial Stability Act of 2010, which includes broad revisions to legislation that Dodd introduced in November and represents the base bill for a full committee markup that is slated to begin next week.

The introduction of the Dodd bill comes amidst increasingly protracted negotiations between the chairman and his fellow banking committee members Richard Shelby (R-AL) and Bob Corker (R-TN), which were halted before both sides could hash out bipartisan compromises on several significant policy issues—including the authority of a proposed Consumer Financial Protection Bureau and a newly-created process for winding down large and interconnected financial institutions. But according to Dodd, the Senate’s dwindling timeline for action was the most immediate factor driving his decision; while others are viewing Dodd’s move as an effort to ramp up the political pressure on Senate Republicans by bringing the debate out in the open.

Below are the bill’s highlights:

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 Congress was in recess last week for the President’s Day holiday, but Senate Banking Committee staff remained focused on financial reform. Despite the fact that committee Chairman Chris Dodd (D-CT) was spending his break on a congressional trip to Central America – by happenstance with his new negotiating partner Sen. Bob Corker (R-TN) – the committee staff announced that the Chairman would release his “new wide-ranging bill" this week. As of today, that deadline has already slipped to the first week of March, meaning that the committee will not markup the legislation until the second or third week of March at the earliest.

We are hearing reports that the new draft will establish a council of regulators, led by the Treasury Secretary, responsible for monitoring systemic risk across the entire financial system. There have also been reports the draft will include provisions for a new bankruptcy-like system to wind down institutions previously considered “too big to fail.” The FDIC is expected to have a key role in that process.

Separately last week, Sen. Richard Shelby (R-AL), the committee’s Ranking Republican, announced that he was working on a Republican alternative to the Chairman’s financial reform draft. Shelby has made no public statements about Corker’s decision to work with Dodd, but the fact that Shelby is producing his own bill speaks volumes.

There is a lot of prognosticating right now. Corker’s positions are far more in line with Shelby’s than Dodd’s. The question is will Corker be able to convince Dodd to pass a streamlined bill that deals with a few key issues and tables the thorny issue of the Consumer Financial Protection Agency? Many industry experts are saying that Dodd and Shelby would have already worked out that deal if it was possible, and the Republican caucus is likely of the same mind, which puts Corker in a tough position. The outlook for financial reform continues to be very uncertain.

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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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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.

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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.

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This afternoon the House of Representatives took a significant step towards the enactment of comprehensive financial reform legislation, passing the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) by a vote of 223 to 202. Democrats would have preferred a larger margin of victory, but they can take some satisfaction from having now passed three of the Obama Administration's major priorities—climate change, health care, and financial reform.

Throughout the week, the Democratic leadership was forced to fend off several attempts by moderate Democrats to narrow the bill’s provisions, especially those relating to the Consumer Financial Protection Agency (CFPA). On Wednesday, word quickly spread around the Capitol that a federal preemption amendment backed by Rep. Melissa Bean and her allies in the New Democrat Coalition faced strong opposition from the White House and Treasury, who were seeking to bar it from consideration on the House floor. The Bean amendment would have broadened the CFPA’s ability to preempt state consumer protection laws. However, following direct negotiations between the New Dems and top Treasury officials, a modified version of Bean’s preemption amendment was ultimately wrapped into a manager’s amendment that passed on Thursday.

Another significant amendment, opposed by House leadership and the White House, was offered by Rep. Walt Minnick (D-ID). Minnick's amendment would have replaced the Consumer Financial Protection Agency (CFPA) with a Consumer Financial Protection Council (CFPC), comprised of 12 members, including, among others, the Secretary of Treasury, the Chairman of the Federal Reserve and the chairman of the CFTC and SEC. Although rejected by a vote of 208-223, Minnick was able to pick off 33 Democrats, potentially providing momentum for a CFPA alternative in the Senate where the Banking committee is still working on a bipartisan compromise.

The defeat of the "cramdown" amendment offered by Rep. John Conyers (D-MI) was a victory for the banking industry. Conyers' amendment would have enabled bankruptcy courts to modify mortgage repayment periods, reduce interest rates and fees, and lower the mortgage principal balance to the level of a home’s fair market value. Although the House passed similar language as part of the Helping Families Save Their Homes Act of 2009 (H.R. 1106) in March, the amendment was rejected today by a vote of 188-241.

Now that Financial Services Committee Chairman Barney Frank (D-MA) got his comprehensive reform package passed before the holidays, the pressure is on Senate Banking Committee Chairman Chris Dodd (D-CT) to produce results on his side of the Capitol.

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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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…But first, the House Rules Committee will meet this afternoon and Wednesday to consider nearly 250 amendments that have been filed to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), initiating a process that will set the parameters for a series of votes to occur during three days of floor consideration that could begin later this week.

Reflecting increasing pressure from Capitol Hill for the Obama administration to ramp up existing mortgage foreclosure prevention efforts, Rep. John Conyers (D-MI) and Zoe Lofgren (D-CA) have offered an amendment to H.R. 4173 that reincarnates a highly controversial provision—known as “cramdown”—which would allow bankruptcy judges to modify the terms of troubled mortgages.

Identical to the language passed by the House in March under the Helping Families Save Their Homes Act of 2009 (H.R. 1106), the Conyers-Lofgren amendment would authorize bankruptcy courts to modify mortgage repayment periods, interest rates and fees, and even the principal balance if a borrower provides evidence that efforts to complete a loan modification through the Obama administration’s “Making Homes Affordable” program have failed. Despite passage in the House, the cramdown legislation has twice been voted down in the Senate during separate votes in 2008 and 2009.

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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.
 

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

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On home improvement shows, it’s called the big “reveal.”  In Washington, the “reveal” is expected on Monday in the Senate Banking Committee with the much anticipated release of Chairman Chris Dodd’s (D-CT) omnibus financial reform bill. Rumors of its content have been leaking out for several days. Also being revealed --although it has been hinted at for weeks-- is the partisan divide that has opened up on Chairman Dodd's committee.

One of the most controversial elements expected to be in Dodd’s plan is the removal of bank supervisor authorities from the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, and the Office of Thrift Supervision in order to consolidate those authorities into one new super bank regulator. Neither the administration proposal nor House Financial Services Committee measures contemplated this approach. In fact, Financial Services Committee Chairman Barney Frank (D-MA) has criticized the concept because it does not “respect and preserve the dual banking system;” it undercuts the role of state bank supervisors; and it fails to preserve the role of the FDIC, an agency that Frank thinks is performing well.

Other expected provisions are a “Council of Regulators” approach to systemic risk; a Consumer Financial Protection Agency that will have oversight over most financial service products except for insurance or securities; credit rating agency reform; resolution authority for large financial institutions; and regulation of derivatives. Dodd plans to hold one or more hearings on his bill the week of November 16th and expects the committee to markup the bill after Thanksgiving.

Dodd has decided to move ahead without the support and assistance of Ranking Member Shelby (R-AL) and the other committee Republicans. Some are viewing this as a setback given that Dodd and Shelby had made a show in the past year of their shared views on some key parts of the financial reform agenda. Over the past six-to-eight weeks, as Dodd has pushed to pull the package together, it became clear the GOP side of the committee was reticent to come along. While this prevents the bipartisan approach Dodd had wanted, it does free him to take the bold approach it now appears we will see. Given the importance to his re-election of appearing to shake-up the financial establishment, Dodd may benefit from the freedom to stake out this turf. Whether that will contribute to the ultimate enactment of legislation remains to be seen.

Watch this space early in the week for a discussion of the outlook on the House side for continuation of the progress in assembling a comprehensive financial reform package.
 

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Gaining strong momentum after its passage out of the House Financial Services Committee last week, a bill crafted by Chairman Barney Frank (D-MA) to create a new Consumer Financial Protection Agency (CFPA) ran into a significant and unforeseen roadblock on Thursday – fellow Democrat and equally powerful House Energy and Commerce Chairman Henry Waxman (CA). In what could have been a routine markup of H.R. 3126, the Consumer Financial Protection Agency Act of 2009, the House Energy and Commerce Committee -- whose jurisdiction includes consumer protection and Federal Trade Commission oversight -- made dramatic changes to Frank's bill. One of the most obvious can be gathered from the amended bill's title: the Consumer Financial Protection Commission Act of 2009.

Waxman and the committee's Ranking Member Joe Barton (R-TX) collaborated on the manager’s amendment that would dramatically shift the agency’s governance from a single director to a commission led by a five-person bipartisan panel. Modeled after independent agencies like the Federal Communications Commission and the Federal Trade Commission, the chairman and commissioners would be nominated by the president, confirmed by the Senate, and serve staggered five year terms

Frank expressed sharp disapproval of the Waxman approach, referring to the commission model as “a big mistake” that will “weaken the capacity of the agency to provide consumer protection.” Frank defended the House Financial Services version as a balanced approach that allows a CFPA director to take prompt action, while at the same time, receiving the necessary recommendations and oversight from a board comprised of bank regulators and consumer groups. The differences may need to be resolved on the House floor. Waxman indicated he would have further changes during the floor debate, specifically removing some of the industry exemptions that were carved out by the House Financial Services legislation, including those for merchants, retailers and auto dealers.

The House Rules Committee will be the next stop for the bills where Chairman Louise Slaughter (D-NY) will execute the will of the House Democratic leadership and likely resolve the differences. It would not be in the best interest of the White House or congressional Democrats to have two of its most powerful chairmen battle over consumer protection on the House floor. The schedule is not yet posted, but the Rules Committee reconciliation could occur as early as next week.

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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.

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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.

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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. 

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Ample debate time in Washington can bring the good with the bad. As healthcare reform continues to dominate the congressional agenda leading into the fall, lawmakers have been granted an opportunity to finely tune the legislative details of financial reform—but also a window to resurrect previously rejected ideas from the dead.

This week, House Financial Services Committee (HFSC) Chairman Barney Frank (D-MA) announced his intention to include the so-called “cramdown” legislation into his chamber's broader financial reform package, injecting new life into a divisive proposal that would allow bankruptcy judges to modify mortgages by extending the term, reducing the interest rate, or writing down the principal amount.

During a HFSC subcommittee hearing yesterday to assess the progress of the Making Home Affordable (MHA) Program, Chairman Frank joined a chorus of lawmakers in expressing disappointment that the Obama administration’s loan modification program has not assisted more distressed homeowners. According to Treasury data, MHA has only modified the loans of 12 percent of eligible delinquent borrowers. Figures from some of the large banks are even lower, with Wells Fargo reporting 11 percent of eligible borrowers and Bank of America coming in at 7 percent. Despite the low percentages, the administration is citing statistics that the program has helped reduce the monthly payments of 350,000 homeowners since March.
 

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After a summer of raucous town hall meetings, the dip in President Obama's poll numbers, and the death of Senator Ted Kennedy, members of the House and Senate may well be relieved to return to the routine of the Washington legislative process. With all the turmoil already seen and now expected, there is a flavor of the circus being back in town.

We're actually picturing a three-ring circus— the "main ring" in the middle is where the health care debate is playing out. In the smaller rings we have climate change and financial reform. The action will shift back and forth at various times but all three rings will have their moments of action. While the ultimate fate of climate change legislation is very much in doubt, health care reform and financial reform are better bets to see final or near-final action in the next four months.

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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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The House of Representatives took the first steps towards enacting President Obama’s sweeping financial reform proposal today, voting 237-185 to approve the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) requiring all publicly-held companies to hold non-binding annual shareholder votes and expanding SEC authority over incentive-based compensation structures. Although the bill’s passage represents a major victory for the president and the Democratic Congress, it may prove to be the least controversial element of financial reform, as stark divisions remain on both sides of the aisle concerning the creation of a Consumer Financial Protection Agency and an expanded role for the Fed as a systemic risk regulator.

Unsurprisingly, this afternoon’s vote fell largely along party lines, with only two GOP members supporting the measure and 16 Democrats opposing. The House also approved, by a vote of 242-178, an amendment offered by Chairman Barney Frank (D-MA) that struck language prohibiting “clawbacks ” of executive compensation approved by shareholders. The amendment also inserted language that would prohibit clawbacks of incentive-based pay if a compensation agreement was in effect prior to this bill's enactment.

As the executive compensation legislation moves to the other side of the Capitol, conventional wisdom dictates that the Senate saucer will ultimately cool the House’s hot teacup – but this historical assumption may not apply for this bill.  The executive compensation debate was further inflamed yesterday following the release of New York Attorney General Andrew Cuomo's report showing that the nine largest U.S. banks paid out $32.6 billion in bonuses in 2008 -- a year in which total losses reached $81 billion and nearly $200 billion of taxpayer money was directly injected through the Troubled Asset Relief Program (TARP).  Moreover, a handful of lawmakers on the Senate Banking, Housing and Urban Affairs Committee currently facing tough re-election bids in 2010 – including Committee Chairman Christopher Dodd (D-CT) – will likely avoid putting themselves in a vulnerable political position by advocating reforms that deviate too much from the House legislation.

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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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House Financial Services Committee Chairman Barney Frank (D-MA) changed the game yesterday with his announcement that the House would tackle financial reform by considering a series of smaller, targeted bills rather than a more comprehensive reform bill. Frank said he anticipates his committee will move four to six separate bills between July and the end of the year. First out of the gate will be legislation to create a new "Consumer Financial Protection Agency" proposed by the Obama administration.

With Frank’s Senate counterpart, Banking Committee Chairman Chris Dodd (D-CT), fully occupied managing health care legislation, the timeline continues to slip in the upper chamber. Frank remains committed, however, to working the major issues through his committee this summer, and has already scheduled thirteen hearings and markups for July.

There is little doubt Congress will impose new consumer protections on the financial service industry. Whether it will create a new agency to police them remains to be seen. Given budget concerns and other competing priorities, Congress may ultimately determine to enhance the consumer protection requirements, including simplified disclosure, within the existing regulatory framework of the SEC, FDIC, Federal Reserve, and the potentially combined Offices of the Comptroller of the Currency and Thrift Supervision.

House Financial Services Committee Schedule

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Now that everyone has had a day or more to digest the Obama administration’s plan for Financial Regulatory Reform, suggestions, questions, and critiques are coming from all corners. Here is a sampling of the top issues under discussion.

Systemic Risk Regulator –

Sen. Mark Warner (D-VA), who sits on the Banking Committee, objects to the plan’s expansion of the Federal Reserve’s role in managing systemic risk, believing it would concentrate too much power in one entity. Warner instead proposes the establishment of a Systemic Risk Council comprised of the Treasury, the Fed, and the other financial regulators that would, together with a permanent council staff, be able to assess and minimize risks comprehensively across the financial landscape. The House Republicans also prefer the council approach, proposing their own version – the “Market Stability and Capital Adequacy Board”-- last week.

Tier I Financial Holding Companies --

What companies will be considered Tier I Financial Holding Companies and subject to new regulation by the Fed? The Fed and Treasury are to establish the criteria, but some companies that are not currently subject to federal regulation might include General Electric, Berkshire Hathaway, State Farm Insurance, or even WalMart. Those not used to federal regulation will be given five years to ease into the new regime – the non-financial activity restrictions in the Bank Holding Company Act.
 

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Last month we were entertained by a Financial Service Primer set in Winnie the Pooh’s Hundred Acre Wood. Since then, Christopher Robin has unveiled his big plan to reform the financial services markets.  Please click below to read about financial reform through a different lens.

Another Romp Through the Hundred Acre Wood

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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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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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In which we look back at an action-packed hundred days of change in an allegorical-ish kind of way. Please click here to read how a cast of characters who may seem very familiar has dealt with some very large-ish problems.
A Story of a Hundred Days

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In a letter to House and Senate leaders yesterday, Treasury Secretary Timothy Geithner proposed amending the “Commodity Exchange Act , the securities laws, and other relevant laws” to enable the government “to regulate the OTC [over-the-counter] derivatives markets effectively for the first time.” A related Treasury press release explains, “As the AIG situation has made clear, massive risks in derivatives markets have gone undetected by both regulators and market participants. But even if those risks had been better known, regulators lacked the proper authorities to mount an effective policy response.”

The Obama Administration therefore proposes changing laws, rules, and practices in order to put in place the following requirements aimed at minimizing risk to the financial system; promoting efficiency and transparency; preventing fraud and market abuses; and protecting against the inappropriate marketing of OTC derivatives to “unsophisticated parties”

• Clear all standardized OTC derivatives through regulated central counterparties (CCP), which are to impose robust margin requirements and necessary risk controls.
• Subject OTC derivatives dealers and firms that create large exposures to counterparties to a “robust regime of prudential regulation” to include—conservative capital requirements; business conduct standards; reporting requirements; and initial margin requirements with respect to bilateral credit exposures
• Authorize the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to impose—recordkeeping and reporting requirements; requirements for trades not cleared by CCPs to be reported to a regulated trade repository; obligations on the CCPs and trade repositories to make aggregate data on open positions and trading volumes publicly available and individual counterparty’s trades and positions available to federal regulators; moving standardized trades onto regulated exchanges and regulated transparent electronic trade execution systems; the development of a system for timely reporting of trades, prices, and other trade information.
• Give the CFTC and the SEC the authority—to police fraud, market manipulation, and other market abuses; to set position limits on OTC derivatives that perform or affect a significant price discovery function with respect to futures markets; and to gather the complete picture of market information from CCPs, trade repositories, and market participants for market regulators.
• Strengthen the laws and participation limits to ensure that OTC derivatives are not marketed inappropriately to “unsophisticated parties.” The CFTC and SEC are reviewing current participation limits to recommend tighter limits or increased disclosure requirements related to marketing derivatives to counterparties “such as small municipalities.”

House Financial Services Committee Chairman Barney Frank (D-MA) and Agriculture Committee Chairman Colin Peterson (D-MN), whose committee has jurisdiction over the CFTC, released a joint statement welcoming the Treasury proposals and committing to working together to achieve “strong, comprehensive, and consistent regulation of OTC derivatives.”

Treasury: Letter to Harry Reid Re: Regulatory Framework for OTC Derivatives (PDF) 

Treasury: Press Release Re: Regulatory Reform for OTC Derivatives

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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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International summits are frequently more about atmospherics than they are about substance. The G20 meeting just concluded in London was no different from the norm. On a substantive level, the most consequential outcomes were the $750 billion in IMF capitalization ($500 billion in loans and guarantees and $250 billion in Special Drawing Rights) to aid emerging nations, $250 billion in trade credits from the IMF, and $100 billion in loans from other multilateral institutions. Certainly a substantial allocation of resources, but hardly a package that required heads of government for approval.

What did require the presence of the leaders of these nations was the display of common purpose that emerged from the meetings. While no concrete steps were agreed to, the mutual commitments to expand trade, tighten financial regulation, establish global monitoring systems and support greater transparency in executive compensation demonstrate a recognition of many of the key elements that led to the current crisis. The communiqué issued at the conclusion of the meeting touches on all these issues.

While not a crucial issue in the discussions, the matter of regulation of tax havens came into focus in the American media because of President Obama's reported role in bridging a divide between French President Nicholas Sarkozy and Chinese Premier Hu Jintao. According to an account from the White House that was corroborated by French and German government sources, Obama pulled the two leaders aside, first separately and then together, to negotiate a language change that papered over the differences that had emerged between the two during the group discussions. American media have reported widely on this sideshow because it is viewed as reflective of the difference in style between this U.S. President and his predecessor.

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The House of Representatives approved yesterday, by a vote of 247 to 171, the “Pay for Performance” bill (H.R. 1664), which would prohibit TARP recipients from paying “unreasonable or excessive compensation” to its employees. The legislation tasks the Treasury Department with defining exactly what is “unreasonable or excessive.” The bill also repeals the controversial amendment in the American Recovery and Reinvestment Act that exempted bonuses based on employment contracts dated prior to February 11, 2009. While this is a far cry from the AIG-targeted bill the House passed earlier— imposing a 90 percent excise tax on AIG bonuses—H.R. 1664 is one more example of government treading into traditionally private sector turf.

The legislation applies to companies that have outstanding capital investments from the TARP or through the Housing and Economic Recovery Act, which covers Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition to prohibiting unreasonable or excessive compensation, affected companies could not pay bonuses or other supplemental payments not directly based on performance standards set by Treasury. The Treasury Secretary has the authority to exempt community investment institutions and institutions receiving less than $250 million from the TARP. The legislation also directs Treasury to establish a payback process for those institutions that would prefer to return the government’s money rather than be subject to the new compensation rules. For those institutions subject to the rules, the bill requires them to submit an annual report to Treasury with the number of employees whose compensation falls into each of these categories: over $500,000; over $1 million; over $2 million; over $3 million; and over $5 million.

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On Monday's post, we pointed out the potential for posturing at the G20 due to the high stakes and the short-meeting format. On Tuesday, French President Nicholas Sarkozy threatened to walk out of the meeting if there was not agreement on strong international regulation of financial markets.

The draft communiqué for the meeting, which has been circulating for several days, includes a call for broader regulation of hedge funds and other financial firms and products but leaves unclear how strong international regulatory bodies would be in relation to national ones. President Obama is certain to resist any effort to include language that would suggest placing an international body in a superior position to US agencies. If Sarkozy were to make good on his threat, it is difficult to predict who would be injured.

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In 1961, a young American president made his first trip abroad to confront the major international issue of the day. History has judged that his perceived weakness on that trip led to serious troubles down the road. That chain of events has echoed through the presidencies of each man who has followed John F. Kennedy. It echoes today as President Obama prepares to make his first foreign trip since taking office. While the American press is playing up the G20 as a confrontation between American-style capitalism and a more social-democrat model, the Obama administration seeks to play down the drama by saying there is no need for all G20 leaders to agree on the specifics of recovery policies. However, there may be leaders at the meeting who see an advantage in setting themselves apart from the U.S. approach to recovery, in particular with regard to stimulus. If some seek confrontation, President Obama will be under pressure to push back and be perceived at home as having "stood up" to the world.

The potential for posturing at the G20 is increased by the fact that this is a one-day meeting. There will be no time for venting followed by a cooling off period and then a coming together around common goals. Each leader will walk into the meeting with a plan and the opportunity for adjustment during the day will be limited.

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On Thursday, U.S. Treasury Secretary Tim Geithner unveiled the Obama administration’s comprehensive framework for reforming the regulation of the financial system. The plan will be a hot topic ahead of next week’s G20 summit in London and is being closely scrutinized in capitals worldwide.

In his testimony yesterday before the House Financial Services Committee, Geithner told the panel,

“Our hope is that we can work with Europe on a global framework, a global infrastructure which has appropriate global oversight, so we don't have a Balkanized system at the global level, like we had at the national level."

He added that that the financial sector needs to be tightly regulated so that it can never again threaten the collapse of the wider economy.

Geithner said the administration is first focusing on systemic risk because the issues around it require the most global cooperation and will be at the center of the G20 agenda. Clearly, the Obama administration is moving towards a position that would enable substantive discussions with European leaders. Such discussions may result in new roles and powers for international organizations, including the Financial Stability Forum and the International Monetary Fund (IMF).

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Following a cautiously, positive welcome of the Obama Administration’s “toxic asset” plan to revive banking activity earlier in the week, the U.S. President yesterday evening delivered a speech that included comments on the G20 preparations. A few hours earlier, the French President Sarkozy had delivered a keynote speech with some striking similarities but also with a few, noticeable, differences.

President Sarkozy re-emphasized his statements from September 2008, which some observers at the time regarded as exaggerated, that the financial crisis is unprecedented in its scope, that nobody knows when or how it will end, but that the world will look different once it is over. He went on to underline that the crisis, in his government’s view, is both an intellectual and a moral one and that a more “moral” capitalism will have to emerge as result. Sarkozy, unsurprisingly, put government action and intervention at the center of the required policy response, which is not inconsistent with the Obama administration’s policy response.

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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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Congress took the first major step yesterday in levying heavy taxes on bonuses paid to executives of AIG and to institutions who have been recipients of significant (more that $ 5 billion) assistance from the Troubled Asset Relief Program (TARP) in recent months. In a move best described as spasmodic, the House voted 323-93 to place a 90 percent tax on the bonuses of TARP-recipient executives with adjusted gross incomes over $250,000.

Senate Majority Leader Harry Reid (D-NV) moved to bring the legislation to the floor yesterday, but Sen. Kyl (R-AZ) blocked the attempt, saying the Senate needs more time to consider the ramifications. Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) introduced a bill late yesterday that would impose a 70 percent excise tax—35 percent on the TARP recipient companies and 35 percent on their executives—on excessive bonuses, defined as anything exceeding $50,000 in a calendar year.

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Over the past months, the G20 has gone from being regarded as yet another over-sized talk shop with little clout to becoming one of the main vehicles for a global response to the crisis.

With stakeholders now hosting increasing and sometimes contradicting expectations, there is a risk that the summit will become a victim of its own success. However, even with an outcome that falls short of producing broad consensus on an all issues, significant progress will have been made if the result is the firm establishment of G20 as the primary, global forum to deal with the crisis.

The G20 preparations now involve the full range of international organizations, trade blocs and stakeholders. The British Government's Business and Enterprise Department and the Confederation of British Industry, the UK's largest business organization, co-hosted a special summit of business leaders from G20 countries—chaired by Lord Peter Mandelson, the Business Secretary—in London on March 18. Separately, the UK Financial Services Authority presented the long-awaited Turner Report with proposals that, if enacted, will introduce dramatic changes to the regulatory framework that governs the City.

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The G20 meeting is fast approaching and has become the single most important focal point for the global efforts to tackle the financial crisis.

The EU has sought to develop a common program for the G20 and to hammer out the main differences between diverging European interests. While nothing should be taken for granted, it seems plausible that the EU States will be singing from a common hymn sheet in London and that they will be defending a joint set of proposals. Their purpose appears to be to advance the cause of global regulation of financial markets.

The EU framework appears to be following the template laid out in the de Larosiere Report, to which we referred in last week’s international update. Following its publication—including 31 proposals providing a comprehensive set of concrete solutions for regulatory, supervisory and global repair action—the EU Commission reaffirmed that:

“the crisis has exposed unacceptable risks in the current governance of international and European financial markets which have proved real and systemic in times of serious turbulence . . . Market surveillance and enforcement of contractual and commercial practices will play an important role in restoring consumer confidence in retail banking.“

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There was plenty of activity in Washington this week but none of it enough to settle the roiling stock market, which keeps sinking like a rock. Is there too much activity or not enough of the right kind of activity?

From the White House and the Treasury—The Obama Administration released the details of its “Making Home Affordable” program, which was introduced in February. With incentives for mortgage holders and servicers, audit and documentation requirements, and qualification limits, major industry players such as the Mortgage Bankers Association and the American Bankers Association reacted positively to the new details.

From the Treasury—Secretary Tim Geithner was on Capitol Hill most of the week defending and explaining the president’s budget proposal, especially the $250 billion “contingent reserve” amount in the Treasury budget to support up to $750 billion worth of asset purchases. Geithner assured the Senate Finance Committee that the $750 billion is not an estimate of future rescue efforts, but rather “just a recognition of reality that it’s possible we’re going to need to do this with more resources.” The Secretary promised to provide more details in the coming weeks on future bailout efforts, including plans for the remaining $300 billion of TARP funds, and the eagerly anticipated public private partnership to take on troubled assets.

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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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Some surprises were included in today's announcement by the Federal Reserve and the Treasury on new developments with the soon-to-be $1 trillion Term Asset-Backed Securities Loan Facility (TALF). Of particular note is the statement that the two agencies will push for legislation to re-tool the program.

According to the joint release, the TALF is “designed to catalyze the securitization markets by providing financing to investors to support the purchase of certain AAA-rated asset-backed securities” and will at first be limited to newly and recently originated auto, credit card, student, and SBA-guaranteed small business loans. The TALF funds will go out monthly starting in March, and they are already anticipating a program expansion for April that will include “asset backed securities (ABS) backed by rental, commercial, and government vehicle fleet leases and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment.” The Treasury and the Fed are also analyzing how to expand the program in future months to include commercial mortgage backed securities and other AAA-rated, newly issued ABS.

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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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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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The Senate passed the financial reform package tonight by a vote of 74 to 25. We'll have more analysis in the morning and a look ahead to House action.

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With confidence in Senate passage running high, Washington's attention -- and Wall Street's -- is turning back to the House. House Majority Whip James Clyburn (D-SC) told reporters this afternoon that he expects the House to vote on the Senate rescue package on Friday. On Thursday, the House will likely debate the "rule" for the package, which dictates whether and how members can amend the legislation.

Discussion today has focused on the impact in the House of the items the Senate is adding to the legislative package. The calculus involved is illustrated by looking at one of the "add-ons," the one-year fix for the alternative minimum tax (AMT). If Congress does not alter the AMT, as many as 22 million additional taxpayers, including many middle income taxpayers, could confront it in April. The House recently voted on a stand-alone AMT relief bill on September 24, and 393 members voted for it – 200 Democrats and 193 Republicans.

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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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House and Senate negotiators and the Administration reached a deal overnight on the financial rescue package. Staff has spent a sleepless night drafting and a vote in the House is expected as early a this evening.

Our next report will have more details, but the plan does include the following

• A total of $ 700 billion for investment in troubled assets.
• A phased approach to releasing funds as described in our report last evening.
• A requirement for the president to submit a plan for recouping lost funds if the program does not turn a profit upon the sale of assets.
• Limits on "golden parachutes" for executives of forms from which assets are purchased.

The other elements are largely along the lines readers of these reports will expect.

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In a day of fast-moving developments there are some signs that discussions on a financial rescue package may re-start in a constructive way. According to Sen. Harry Reid (D-NV), House Republicans have agreed to return to the negotiating table at the noon hour under the leadership of House Minority Whip Roy Blunt (R-MO). To the extent the conversation is required to reach a compromise, this is a sign of progress in getting to a deal. Blunt will be bringing with him an outline of the House GOP plan to deal with the financial crisis. The key elements of that plan are the following:

• Federal insurance of mortgage-backed securities (in addition to the insurance already provided to Fannie Mae and Freddie Mac products). Premiums paid by asset owners would support the program.
• Regulatory and tax relief for the financial industry (e.g ability to suspend dividend payments).
• A cut in the capital gains tax.
• Greater transparency in reporting of the types of assets held by financial institutions and greater SEC scrutiny of audit reports.

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Momentum continues to build for enactment of the $700 billion Administration plan to buy troubled assets from financial institutions. As an indicator of the increasingly upbeat mood around the package, the Dow Jones Industrial Average increased by over 200 points for the day.

As we write this, President Bush is meeting with Sens. McCain and Obama and Congressional leaders to discuss how to advance the plan. While this meeting is viewed by many as a sideshow, a forceful statement by the sitting president and the two men seeking to replace him will add to the overall sense that action on Capitol Hill is soon possible.

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The Treasury Department this past weekend submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system.

The following description reflects Treasury's proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

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