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In rare burst of bipartisanship last week, the House of Representatives passed a capital formation bill – H.R. 3606, the “Jumpstart Our Business Startups Act” (JOBS Act) – by a vote of 390 to 23. Even the White House issued a Statement of Administration Policy in support of the bill, which would ease regulatory burdens on business start-ups. With the Senate expected to complete votes on the highway bill today, Senate Republicans are pressuring the majority to move next to the JOBS Act.

In a letter to Senate Banking Committee Chairman Johnson (D-SD), who is reported to be working with Majority Leader Harry Reid (D-NV) on developing a new, Senate version of the JOBS Act, Banking Committee Ranking Member Shelby (R-AL) raised objections with their drafting a new bill “without any input from Senate Republicans.” Shelby wrote that he “nevertheless” stands “ready to work with you to craft bipartisan legislation” and recommended that Johnson consider capital formation legislation introduced by Senators Scott Brown (S. 1791); Hutchison (S. 556); Thune (S. 1831); and Toomey (S. 1544, S. 1824, and S. 1933). All but two of the six bills Shelby listed have bipartisan sponsors.

Meanwhile, on the Senate floor this morning, Minority Leader Mitch McConnell (R-KY) emphatically urged the Majority Leader to “immediately take up the bipartisan jobs bill the House sent over last Thursday” once the Senate finishes the highway bill. McConnell went on to say, “The House-passed Jobs bill isn’t just important for what it does, but for what it represents. It’s a rare and welcome signal that lawmakers in Washington still value the risk-takers and the entrepreneurs who’ve always been so vital to our nation’s greatness...This is precisely the kind of thing we should be doing in Washington.”

At the end of his statement, McConnell asked for consent that the Senate take up the House JOBS bill and his Democratic colleagues objected. McConnell is expected to continue attempting to bring up the JOBS bill without much success, because Reid reportedly wants to scale back aspects of the House bill as well as add additional issues such as the reauthorization of the Export-Import Bank and an increase in the debt the Small Business Administration can guarantee for small business investment companies to $4 billion. Reid has said the Senate will next move to judicial nominations and has not offered a timeframe for the capital formation legislation.
 

Letter from Senator Shelby to Senate Banking Committee Chairman Johnson (PDF)

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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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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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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 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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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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In yet another attempt to hinder the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the House Appropriations Committee passed two measures this week to dramatically cut the budgets of key regulatory agencies.

The 2012 Financial Services Appropriations Bill includes $12.2 billion for the Treasury Department, which is $929 million below last year’s level and nearly $2 billion below the President’s request. The bill also limits mandatory funds for the Consumer Financial Protection Bureau (CFPB) to $200 million and subjects it to annual appropriations, giving the House more oversight capability. In addition, the bill limits funding to the Office of Financial Stability to $200 million. The bill provides $1.2 billion for the Securities and Exchange Commission, which is equal to last year’s levels and $222 million below the President’s request.

The 2012 Agriculture Appropriations Bill includes $172 million for the CFTC, a 15 percent cut from last year and nearly half of the $308 million the President requested. Subcommittee Chairman Jack Kingston (R-GA) said the bill takes spending to pre-stimulus, pre-bailout levels while ensuring that the CFTC and other agencies “are provided the necessary resources to fulfill their duties.” CFTC Chairman Gary Gensler has been saying for over a month that the CFTC cannot possibly fulfill its new role under Dodd-Frank without additional resources, but Republicans counter that the CFTC has been granted too broad authority and has been overstepping its role.

Some members are taking it even further, with Rep. Scott Garrett (R-NJ) introducing an amendment yesterday which prohibits the CFTC to use appropriated funds to promulgate any final rules until 12 months after the final swaps rules are completed. The swaps rules are slated to be finalized in December 2011, which means the CFTC would be at a standstill until at least December 2012.

CFTC Gary Gensler told the Agriculture Committee yesterday that these budget cuts will stymie the agencies’ ability to enforce Dodd-Frank, which appears to be what the Republicans are banking on.

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With near-perfect unity, Senate Republicans joined their House counterparts this week in calling for significant structural reforms to the new Consumer Financial Protection Bureau (CFPB). And unlike the House, the Senate can take hostages.

On Monday, 44 Republican Senators sent a letter to President Obama threatening to block any CFPB director nominee—regardless of party affiliation—unless their concerns regarding the new agency’s structure and lack of appropriate accountability mechanisms are addressed by Congress. Senators Scott Brown (MA) and Lisa Murkowski (AK) were the only Republicans not to sign the letter.

Specifically, the GOP letter calls for the adoption of reforms in three main areas, including:

• Leadership Structure - Alter 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). GOP senators expressed concern that Dodd-Frank “failed to provide any real checks on the CFPB director’s powers” by providing limited tools for Congress or the administration to remove a director for poor performance and granting the director with “unfettered authority” over the CFPB’s annual budget.

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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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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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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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At a closed-door House Republican conference meeting today, nine-term Congressman Spencer Bachus (R-AL) was selected by his colleagues to chair the House Financial Services Committee when Republicans assume power come January.

In the 112th Congress, Bachus will likely continue his conservative voting record and fulfill his stated intentions to make GSE reform and the reexamination of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) —particularly the provisions related to the newly-established Consumer Financial Protection Bureau (CFPB) and derivatives regulation—his top priorities.

Bachus has reserved some of his most pointed criticism for the CFPB, which he fiercely opposed during the congressional Dodd-Frank debate, and has often referred to as the “Credit Allocation Bureau.” In late November, Bachus joined fellow committee colleague, Rep. Judy Biggert (R-IL), in sending letters to the inspector generals of both the Treasury Department and the Federal Reserve, directing them to conduct an investigation and issue reports to Congress regarding the work currently being done by Treasury, the Fed and White House special advisor, Elizabeth Warren, to establish the CFPB. The letters cite "a clear absence of accountability and transparency" regarding the CFPB’s implementation and thus requires "rigorous" administration oversight. Bachus’s recent letters are part of a broader effort to “reinvigorate the committee’s oversight role,” in the next Congress. Bachus is expected to join with fellow Republican Darrell Issa (CA), the incoming chairman of the House Oversight and Government Reform Committee, to quickly initiate Dodd-Frank oversight hearings in 2011.

Although Bachus has served as the committee’s top Republican since beating out Howard Baker (R-LA) in 2006 and was considered the leading contender for the chairmanship, he was challenged this week by senior committee member Ed Royce (R-CA). However, Bachus was assisted by significant support from his senior Republican colleagues, as six senior Financial Services subcommittee members and the vice chairman all signed a letter on November 5 supporting his candidacy.

Bachus will replace outgoing Chairman Barney Frank (D-MA), who is expected to reassume the role of ranking member, a position he last held in 2006.
 

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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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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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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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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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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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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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Heading into the House Financial Services Committee's markup of the CFPA bill last week, a handful of moderate, pro-business Democrats—including Reps. Melissa Bean (IL) and Jim Himes (CT)—banded together with the intention of significantly watering down bill language that scraps long-standing federal preemption laws related to consumer protection. However, merely a week later, and in the midst of suggestions from Democratic colleagues that a reinstitution of federal preemption laws would hamper the rulemaking ability of the states and ultimately poison the overarching bill, Bean and her allies were only able to muster a few drops as the committee approved legislation this morning by a vote of 39-29.

Instead, by voice vote, the committee agreed yesterday to an amendment to the Consumer Financial Protection Agency Act of 2009 (H.R. 3126) that allows the Office of the Comptroller of the Currency (OCC) or the Office of Thrift Supervision to intervene and preempt state laws on a limited basis, only in cases where state law discriminates against nationally chartered institutions or “significantly interferes with” national banks’ ability to engage in banking. Offered by Reps. Mel Watt (D-NC) and Dennis Moore (D-KS), the amendment still leaves in place bill language that severely limits the exemptions from state laws that nationally chartered thrifts, banks, and their operating subsidiaries have enjoyed since 2004. 

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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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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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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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Your Financial Reform Watch team has reported before on key legislators' misgivings with the administration's plan to make the Fed the systemic risk regulator for so-called "Tier 1" financial holding companies. Those misgivings are holding sway now on Capitol Hill and are beginning to take hold in the administration itself.

Just yesterday, SEC Chairman Mary Shapiro and FDIC Chairman Sheila Bair were the latest to endorse what Shapiro referred to as a “hybrid approach,” one that would significantly strengthen the president’s current proposal of creating a Financial Services Oversight Council, responsible for collecting data and identifying emerging financial market risks for the Fed. Instead, both Shapiro and Bair envision a council of regulators that would work in concert with the central bank. Additionally, Bair recommended that, in order to ensure independence, the chairman of the council should be a presidential appointee subject to Senate confirmation.

On the Senate side, Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) are both giving voice to concerns about the enhanced role for the Fed. Shelby has been an outspoken critic of giving the Fed such authority from the start, but Dodd’s statements at a committee hearing yesterday that the “new authority could compromise the independence of the Fed when it provides monetary policy,” and that he “expect[s] changes to be made to this proposal," made it clear the Senate is heading in a direction different from the administration's.

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The quick emergence of GM and Chrysler from bankruptcy has been viewed as a victory for the Obama Administration in demonstrating that the government is focused on moving the companies through their restructuring and keeping them on the road to once again being private companies. Now a majority of Members of the House, including two key Democratic leaders, are pushing legislation that could jeopardize the restructuring plans supported by the White House.

As we write this, a bipartisan group of 240 House Members and 20 Senators are supporting legislation that will allow auto dealers who have lost their franchises in the restructuring to recover them simply by requesting their reinstatement from the auto companies. The legislation was attached to the House version of the Financial Services Appropriations bill last week by a unanimous vote of 60 to 0. The legislation would require Chrysler and GM, at the request of an auto dealer, to restore the dealer franchise agreement in effect prior to each manufacturer’s bankruptcy proceeding. The bill could save around 2000 franchises according to some estimates, although that may be high, since many dealers have already closed. Some had feared the House Rules Committee would remove the language from the Financial Services Appropriations bill, but the language will remain in section 745 of the bill when the House votes on the measure tomorrow.

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Demonstrating that Congress intends to put its own stamp on financial reform legislation, House Democrats on July 8 introduced their own scaled-back version of the new consumer protection agency proposed by President Obama. Coming on the heels of the president’s release of draft legislation to create a new independent regulator for financial products and services, House Democrats responded quickly on Wednesday by unveiling the Consumer Financial Protection Agency Act of 2009 (HR 3126).

The bill was introduced by House Financial Services Committee Chairman Barney Frank (D-MA). While it retains many of the key provisions outlined within the White House bill—including the transfer of consumer financial regulations to the CFPA in order for the new agency to write and enforce rules on financial products of both banks and non-banks—it is notable for several significant differences from the Obama proposal that may limit the CFPA’s jurisdiction.

In particular, the House bill preserves the current regulatory enforcement structure for the Community Reinvestment Act (CRA), which is overseen by the Office of the Comptroller of the Currency (OCC), the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) in order to ensure that depository institutions are engaging in fair lending practices to low-income communities. Additionally, unlike the President’s bill, which assumes a merger with OTS and OCC to form a new prudential regulator titled the National Bank Supervisory (NBS), H.R. 3126 makes no mention of NBS. Frank’s press release goes on to state that the details of the President’s merger proposal will be considered “at [a] later date.”
 

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The Treasury Department today released draft legislation outlining a central pillar of the Obama administration’s financial regulatory overhaul: the creation of the Consumer Financial Protection Agency (CFPA), an independent regulator with broad authority over “any financial product or service” used by consumers. Seeking to clarify the administration’s June 17th white paper on financial regulatory reform, the legislation provides lawmakers and industry leaders with the statutory details regarding the proposed CFPA.

According to the draft language, in order to continuously monitor consumer risks, the agency—composed of a five-member board led by a presidentially-appointed director subject to Senate confirmation—would collect information related to loans, products, and services from both banks and non-banks. Additionally, consumer financial regulations that are currently divided among several agencies—the Federal Reserve, FDIC, Office of Comptroller of the Currency, Office of Thrift Supervision, Federal Trade Commission, and National Credit Union Administration—will be consolidated within the CFPA. The legislation would have these regulators transfer functions, rules, and employees to the new CFPA within six to eighteen months following enactment. The agency must research, analyze, and report on consumer awareness and understanding of financial products, related disclosure statements, related risks and benefits, and consumer behavior related to such products. The agency would also collect and track consumer complaints and create a new, integrated disclosure form for mortgage transactions, unless the Department of Housing and Urban Development and the Fed can achieve the same goal prior to the transfer of such responsibilities to the CFPA. There are also provisions related to civil penalties and enforcement authority.

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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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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 a more subdued response to the AIG bonus brouhaha than last week, the House Financial Services Committee yesterday approved legislation that would amend the Emergency Economic Stabilization Act to prohibit companies receiving TARP money from paying “unreasonable and excessive compensation and compensation not based on performance standards.” Two Republicans, Reps. Ed Royce (CA) and Walter B. Jones (NC), broke ranks to vote with the committee’s Democrats in favor of the bill (H.R. 1664). Some of our Congressional sources have said the full House may vote on H.R. 1664 as early as next week. The Senate, however, is almost certain not to address executive compensation until after it returns on April 20th from the spring Congressional recess. Democratic leaders from both sides of the Capitol have greatly dialed down the executive compensation rhetoric since last week.

Under H.R. 1664, the Treasury Secretary, with the members of the Financial Institutions Examination Council, would have a month to define “unreasonable and excessive compensation” and set performance based standards that companies would use to determine circumstances under which a bonus or retention payment would be allowed. Examples of the standards Treasury is to include are the stability of the financial institution; its ability to repay the government; individual performance; employees’ adherence to risk management requirements; and any others that would provide greater accountability to shareholders and taxpayers.

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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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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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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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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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The Senate returns to work today and the House is scheduled to convene on Wednesday. In the past several days, it has become clear that neither significant economic stimulus nor aid to the auto industry is likely to be approved during this "lame duck" session of the 110th Congress. The sticking point appears to be the inability of Democratic leaders to attract sufficient Republican support for either measure.

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Events of yesterday continued to demonstrate how major elements of the current financial crisis are interrelated. First, with the world waiting to see how a new administration in Washington will approach the financial crisis, President Bush's announcement of a November 15 summit of international leaders puts the discussion of a new regulatory regime for the financial sector squarely in the middle of the U.S. presidential transition. While both Sens. John McCain and Barack Obama praised the summit, it will present the winner of the November 4 election with an interesting quandary—how to participate in and/or react to the event. It may also force the hand of the President-Elect to name his economic team before the summit takes place. Doing so will allow the administration-in-waiting to have a more organized response to the events of the summit.

Second, the impacts of the financial crisis on the U.S. auto industry may be putting additional pressure on the $700 billion rescue package enacted on October 3. As potential car buyers continue to face a credit crunch, bipartisan leaders of the Michigan congressional delegation yesterday urged the Treasury to make a portion of the funds available to back auto loans. The request came from House Energy and Commerce Committee Chair John Dingell (D-MI) and Rep. Fred Upton (R-MI). If Treasury takes up that suggestion, funds available to supply capital to community banks or purchased troubled mortgages would be reduced.

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The House of Representatives just passed the financial rescue package (H.R. 1424) by a vote of 263 to 171. The breakdown of Democrats and Republicans supporting the bill was 172 and 91 respectively. The Democrats picked up 32 votes and the Republicans picked up 26.

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The president signed the Emergency Economic Stabilization Act of 2008 within hours of the House passing the bill on October 3rd. As the administration begins the important work of implementing the Troubled Asset Relief Program (TARP), we thought it would be instructive to explore the reasons why House Democrats and Republicans shifted their votes so that Monday’s defeat became Friday’s victory.

Although one Democrat switched from a yes to no (Rep. Jim McDermott, D-WA), 33 House Democrats switched their votes to support the rescue plan on Friday. The fiscally conservative Blue Dog Caucus, which had been almost evenly split on Monday added five more to the yes column on Friday. A large number of freshman Democrats and Congressional Black Caucus (CBC) members, many of whom had been skeptical of the bailout plan on Monday, shifted in support of the final package. The 31 of 39 CBC members who voted yes said they did so based on the promises of Sen. Barack Obama, who said he would deliver economic stimulus legislation, a change in bankruptcy laws, and more regulation of Wall Street early in an Obama Administration. Democrats also picked up seven California members due to the escalation of financial problems in their state.

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Wall Street is still on pins and needles due to the increase in jobless claims, the decline in factory orders, and the uncertainty surrounding tomorrow’s House vote on the financial rescue plan. The Dow Jones Industrial Average lost nearly 350 points today.

The House Rules Committee is meeting as we write. Our contacts on the Hill are telling us to expect a "closed rule," which means the House would not be able to amend the Senate-passed legislation. The House is scheduled to convene at 9 a.m. tomorrow for a yet-undetermined amount of debate followed by the vote.

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

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

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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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The stock market closed a few minutes ago and today's increase of 485 points in the Dow Jones Industrial Average is indicative of the view that Washington is moving past the shock of yesterday's House vote and towards a new push to enact a financial rescue package.

Key leadership players have been working hard today to rally the troops and change the package in ways that will garner additional votes in the House. The White House conducted a series of outreach calls today to groups ranging from GOP "insiders" to representatives of state and local government and other advocacy organizations. All of this was designed to drive home the point that action is needed on a plan very much like the one put before the House yesterday. Congressional leaders have been doing likewise. Individual Members of Congress -- many of whom have gone home for the two day Rosh Hashanah break -- are also hearing from their constituents. Given the recent tenor of constituent input, that may not be helpful.

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Progress towards action in the House and Senate continues apace. House leaders expect a vote on the Emergency Economic Stabilization Act tomorrow. The Senate will take up the measure as well, but action on Monday may be limited to filing a cloture petition, which would mature on Wednesday. The Senate could vote tomorrow if leaders can obtain a unanimous consent agreement, but that is difficult.

While the bipartisan, bicameral leadership appears united on approving the package, there is enough opposition on the right and left to make things interesting. This is particularly true in the House, where some influential members on both ends of the spectrum are organizing opposition.

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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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Leading negotiators from the House and Senate began a negotiating session at noon today with a goal to work as long as it takes to resolve the 15 issues remaining on the table. They are taking a break as we write this, with plans to return to their discussions this evening. Secretary Paulson is in the Capitol to assist the negotiators and ensure the Administration's views are being taken into account. Momentum continues to build towards the announcement of a deal by Sunday afternoon. Leaders of the House and Senate hope to have votes on Monday, but the complexities of drafting the legislation may require that votes be pushed off until after Rosh Hashanah which ends on Tuesday at sundown.

As this afternoon's negotiating session began Sens. Judd Gregg (R-NH) and Mitch McConnell (R-KY) both said the Senators and Representatives meeting today would stay in the room until a deal was reached. While that may be over-optimistic, it is indicative of the fact that these leaders are feeling pressure to get something accomplished.

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The Dow Jones Industrial Average is ending the week with an increase of 138 points based on today's news that discussions over the financial rescue package are moving forward. Expectations for enactment of a package are such that key legislators are now pointing to the opening of the Asian markets on Monday, which takes place Sunday night East Coast Time, as the deadline for, at the very least, having a consensus rescue package ready for passage.

At this point, there are four key negotiators finalizing the terms of a legislative compromise: House Financial Services Chairman Barney Frank (D-MA), Senate Banking Committee Chairman Chris Dodd (D-CT), House Minority Whip Roy Blunt (R-MO), and Senate Budget Committee Ranking Member Judd Gregg (R-NH).

Senate Minority Leader Mitch McConnell (R-KY) held a news conference earlier this afternoon declaring that Gregg has full authority to represent Senate Republicans. Gregg, who appeared with McConnell, told reporters the markets are "telling us we better do something, and they're telling us in pretty stark terms." While Gregg agreed there are still "knotty and difficult issues" to negotiate, he said they are making progress.

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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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There has been a seismic shift in Congressional attitude over the past 48 hours. Skepticism over the administration’s plan has evolved into hardened resolve to achieve consensus and pass a financial relief package as soon as possible. People are still reluctant to commit to a timeframe, but the pace has quickened. Whereas two days ago, Senate staff were waiting for their House counterparts to draft a plan, reports now indicate that both sides began working together yesterday to craft a single, unified plan.

Publicly, several lawmakers, including Senate Banking Chairman Chris Dodd (D-CT) and House Financial Services Chairman Barney Frank (D-MA), have said Congress and the administration are very close to striking a deal in the next “day or so.” At 10 a.m. this morning Frank hosted Dodd as well as Sen. Bob Bennett (R-UT), a senior member of the Senate Banking Committee, and Rep. Spencer Bachus (R-AL), the ranking member of the House Financial Services Committee, to continue drafting the plan. We have reports that the drafting session will expand to include others and will continue all day. Congressional leaders are working to have a consensus plan by today’s 4 p.m. meeting at the White House with President Bush and the presidential candidates.

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Spending their every waking hour on Capitol Hill trying to convince lawmakers to accept the financial bailout plan may finally be paying off for Treasury Secretary Paulson and Fed Chairman Bernanke. Reports coming out of meetings held this morning and early afternoon have been decidedly more upbeat than anything we have heard thus far.

In addition to testifying at hearings and briefing large groups, Paulson held a private meeting earlier with House Speaker Nancy Pelosi (D-CA) and Minority Leader John Boehner (R-OH). While aides would not confirm whether the leaders and Paulson struck an agreement, there are signs the administration has made changes to the Paulson plan. In his House Banking Committee testimony this afternoon, close watchers noted that Paulson modified his remarks to allow for a compromise on limiting executive compensation as long as it does not "undermine the effectiveness of the program."

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Washington continues its bipolar approach to dealing with the Bush Administration's proposed plan to purchase, manage and sell troubled assets from financial institutions. Key leaders continue to work on the contours of a plan so that it can be voted on late this week. At the same time, rank and file Members, particularly on the GOP side, are turning up the volume on their objections. We continue to believe prospects are good for enactment of a plan to create a $700 billion investment to purchase assets. However it is clear that several pounds of flesh will be extracted from Secretary Paulson along the way.

Since yesterday, it has become more evident that executive compensation limits of some kind will be included in the final plan. The Administration still opposes this strongly, but they will have little choice but to accept it. Otherwise, there appears to be agreement on including outside oversight over Treasury on the program, protections against foreclosures on homeowners, and the option for Treasury to take warrants for stock from companies that sell assets to them.

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