Financial Reform Watch : Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

In the year since the passage of Dodd-Frank, House Republicans have launched a number of attacks against the Securities and Exchange Commission (SEC), calling it wasteful, inefficient, and incompetent and blaming it for problems ranging from the Madoff Ponzi scheme to the 2008 financial crisis. The SEC has been called anti-free market, anti-business and anti-Main Street, but during yesterday’s day-long House Financial Services Committee hearing on SEC Oversight, Rep. Bill Posey (R-FL) came up with a new one; saying, “The SEC is fracking crazy!”

SEC Chairman Mary Schapiro has plenty of experience being on the defensive, but yesterday even she appeared stunned as legislators asked her why the SEC is overstepping the EPA’s authority and regulating hydraulic fracturing, or fracking, a process used to access underground reserves of natural gas and oil. Shapiro insisted that the SEC’s questions about fracking have been strictly limited to assessing the actual value of oil and gas reserves as printed in investor disclosure documents. However, several reports now claim that the SEC has asked for specific information regarding the chemicals being used as well as companies’ efforts to minimize environmental impacts, asserting that those inquiries cannot reasonably relate to valuing the assets. Further, many companies are now alleging that the SEC is requiring them to disclose proprietary information which could harm their ability to compete.

Rep. Steve Pearce (R-NM) asked Ms. Schapiro about the sources of payments to defrauded Madoff investors as well as the details of several bankruptcy cases where millions of dollars of state and federal funds were lost in bankruptcy. When Ms. Schapiro said that she was not familiar with those cases, Rep. Pearce responded that he was confused as to why the SEC is focusing its energies on regulating fracking while complaining that it lacks the resources to perform its basic duties.

While the true details of the SEC’s interest in fracking may never come to light, House Republicans are conducting vigorous SEC oversight and holding the agency to a standard that it has never in its very mixed history proven it is able to meet. Members continue to argue that the SEC will not receive more funding until it becomes more effective, and the SEC continues to insist that it cannot become more effective until it receives more funding. It’s a Catch-22 without an obvious solution.

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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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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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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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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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In another indication of the knock-on effects of the financial crisis, the auto industry's number one supporter in Congress suffered a preliminary defeat today in his effort to retain a powerful House committee chairmanship. House Energy and Commerce Committee Chairman John Dingell (D-MI) failed to get enough Democratic leadership votes today to retain his chairmanship over challenger Rep. Henry Waxman (D-CA). The Democratic Steering Committee, a leadership organization responsible for determining Democratic committee assignments, voted for Waxman by a vote of 25-22. Waxman is one of the most liberal members of Congress and a champion of environmental issues. Many environmental activists believe that Dingell has spent too long protecting the auto industry, which has resulted in a weakened industry that has failed to produce the cleaner, more efficient cars that consumers want.

The good news for Dingell is he gets a do-over with the full Democratic Caucus which is likely to vote tomorrow to accept or reject the steering committee decision. Dingell believes he has enough votes to prevail over Waxman. The two-dozen incoming Democratic freshmen will participate in that vote, and some believe that Waxman, who endorsed Barack Obama in the Democratic primary, will have more sway with the freshman class. Dingell, who endorsed Hillary Clinton, is expected to draw support from politically moderate members and older members, who are committed to preserving the seniority system.

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While the machinery to oversee Treasury's management of the programs under the Emergency Economic Stabilization Act (EESA) has been slow to gear up, there are signs that the pieces are beginning to fall into place. This comes not a moment too soon, as the clamor from the media and from Capitol Hill for more transparency has been building in the past ten days.

On Friday, November 14th, House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) announced they have picked three of the five members of the Congressional Oversight Panel (COP) established by the EESA. The other two members are to be chosen by House Minority Leader John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY). The fact that the Democratic leaders did not coordinate the announcement of appointments with their Republican counterparts makes it clear that the day of bipartisan cooperation on Capitol Hill has not yet dawned.

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Most people in Washington are carefully tracking political polls today, trying to predict the fates of their presidential and congressional candidates. However, there are others both inside and outside of Washington studying another survey released this afternoon—the Federal Reserve’s quarterly Senior Loan Officer Survey.

The October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices confirms what many have suspected—credit markets are still struggling. Conducted October 2-16, the survey gathered responses from 55 domestic banks and 21 U.S. branches of foreign banks. The survey focuses on two areas:

1. changes in the amounts of commercial and industrial (C&I) loans and
2. changes in credit limits on existing credit card accounts for prime and non-prime borrowers.

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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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As the stock market continues its seesaw sessions this week, the Treasury Department is focusing on implementation of the programs that flow from the financial rescue package assembled in recent weeks.

After Monday's announcement of the capital infusion to the nine largest US banks, attention is turning to the thousands of community and regional banks nationwide that may be eligible for assistance from the capital purchase program. The Treasury Department has announced that November 14 is the deadline for institutions to get their applications in for assistance under the program. Our report on Tuesday, October 14 included the details of the capital purchase program.

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Washington is stepping back from yesterday's debacle in the House of Representatives and taking a deep breath. Yesterday's surprising 205-228 defeat of the financial rescue plan has caused leaders of both parties to assess the situation within their caucuses, and they are thinking about what is required to gain passage of the package. Our first report today will focus on an analysis of the vote yesterday. Our second report will discuss potential changes to the plan that might garner the necessary votes.

Our analysis suggests that if leaders make carefully selected changes to the package, the votes will be there when Congress returns on Thursday. We draw that conclusion after a careful review of the roll call in the House.

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According to our contacts, Congressional leaders do not expect to finish drafting the financial rescue legislation before early this evening. As reported earlier, House Speaker Nancy Pelosi promised to post the final legislation on the Internet by noon today. The timing indicates the House will not vote on the package before tomorrow afternoon at the earliest, given that all sides will need time to review the final package. At a news conference this afternoon, key negotiator Sen. Judd Gregg (R-NH) said he would like to see the Senate vote on Monday. We expect the Senate will vote on the House-passed bill later in the week, following the Jewish holiday. In the meantime, we have received outlines from House and Senate staff privy to the negotiations.

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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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