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

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

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

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

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

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

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

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

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

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

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

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

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The nation’s leading financial regulators took their battle for more implementation and enforcement funding to Capitol Hill Thursday. Their testimony was offered on the first anniversary of the signing of the Dodd-Frank Act.The witness panel at the Senate Banking Committee consisted of Rep. Barney Frank (D-MA), for whom the Act was named; Deputy Treasury Secretary Neal Wolin; Federal Reserve Chairman Ben Bernanke; Securities and Exchange Commission Chairman Mary Shapiro; Commodity Futures Trading Commission Chairman Gary Gensler; Federal Deposit Insurance Commission Acting Chairman Martin Gruenberg; and Acting Comptroller of the Currency John Walsh. Not represented was the agency whose funding is most controversial – the Consumer Financial Protection Bureau. The CFPB opened its doors for business today.

The witnesses met with the mixed response they must have expected . Senate Banking Committee Chairman Tim Johnson (D-SD) opened the hearing by applauding the regulators for their work over the past year and emphasized that “Congress must do its part” to actively oversee the implementation of Dodd-Frank in the years to come. Ranking Member Richard Shelby (R-AL), on the other hand, expressed his frustration with the law, saying that it “provides little comfort to millions of Americans who are facing harsh economic realities.” Sen. Shelby went on to say that when Dodd-Frank was being considered in the Senate the-Senator Chris Dodd (D-CT), for whom the bill is also named, assured him that there would be strong oversight and accountability in the regulatory agencies. Shelby said he regrets that that hasn’t been the case.

Each of the regulators devoted his or her testimony to justifying the regulatory delays and petitioning for increased funding from Congress. Gensler said that regulations have been delayed because “It is more important to get it right, than to work against the clock.” Shapiro argued that the regulators cannot possibly fulfill all of their new responsibilities without increased resources.

Regulatory agencies have taken a hit in House Republicans’ latest attacks on Dodd-Frank. The House Financial Services Appropriations bill slashed several regulators’ budgets to levels at or below their pre-Dodd-Frank budgets, when they had far fewer responsibilities. Frank criticized the cuts during his testimony, saying that Congress can’t argue that it can’t afford to fund regulatory agencies when it continues to spend billions of dollars in overseas conflicts. It should be noted, the Senate Banking Committee is not the venue to battle the funding cuts suggested by the House Appropriations Committee. The Senate Appropriations Committee will take up the spending plan for most of these agencies later this year.

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

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

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

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

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

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

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

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

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

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

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

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

Frank’s Proposed Conference Timetable

Tuesday, June 8th- House conferees appointed

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

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

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

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

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

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

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

Chairman Frank’s recommended list of House Conferees --

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

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

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

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

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

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

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

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

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Aiming to deliver a financial regulatory reform bill to President Obama’s desk before the July 4th recess, this morning Senate Democratic leadership unveiled its list of members charged with reconciling the competing House and Senate versions of the Wall Street Reform and Consumer Protection Act of 2009.

The Senate's lineup of conferees includes seven Democrats and five Republicans, eight of which are members of the Banking Committee and four from the Agriculture Committee:

Banking, Housing and Urban Affairs Committee

• Chairman Christopher Dodd (D-CT)
• Ranking Member Richard Shelby (R-AL)
• Senator Tim Johnson (D-SD)
• Senator Jack Reed (D-RI)
• Senator Chuck Schumer (D-NY)
• Senator Bob Corker (R-TN)
• Senator Mike Crapo (R-ID)
• Senator Judd Gregg (R-NH)

Agriculture Committee

• Chairwoman Blanche Lincoln (D-AR)
• Ranking Member Saxby Chambliss (R-GA)
• Senator Patrick Leahy (D-VT)
• Senator Tom Harkin (D-IA)

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

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Without any votes to spare, the Senate this afternoon approved, by a tally of 60-40, a motion to limit debate on the Restoring American Financial Stability Act of 2010 (S.3217), effectively bringing the Senate’s debate over financial reform to its final stages. Senate Majority Leader Harry Reid (D-NV) says he is now aiming to complete the bill tonight following the consideration of a handful of remaining amendments.

After falling just short of garnering the necessary 60 votes to invoke cloture during yesterday’s session, Senate Democrats were able to pick-up the support of  Sen. Scott Brown (R-MA)—who joined GOP colleagues Olympia Snowe and Susan Collins of Maine as the only Republicans to support cloture—along with Sen. Arlen Specter (D-PA), who was absent during Wednesday’s session. For the second day in a row, Sens. Maria Cantwell (D-WA) and Russ Feingold (D-WI) voted in opposition. Brown appears to have switched his vote after receiving assurances from Democratic leadership that the bill’s proprietary trading ban would be modified in order to shield the insurance industry.

As a result of the successful cloture motion, only amendments deemed “germane” to the legislation will be eligible for consideration, ultimately nixing the possibility for consideration of most of the pending amendments. Amendments likely for consideration are a proposal offered by Sen. Sam Brownback (R-KS) to exempt automobile dealers from the regulatory purview of a newly-created Consumer Financial Protection Bureau (CFPB) and an amendment from Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) that would explicitly prohibit banks and bank holding companies from engaging in proprietary trading activities.

With the votes secured, we expect Democratic leadership to wrap things up either tonight or tomorrow morning.
 

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Falling short of the necessary 60 votes to cut off debate on the Restoring American Financial Stability Act of 2010 (S.3217), a motion to invoke cloture failed in the Senate this afternoon by a vote of 57-42.

Although Maine’s Republican Senators Olympia Snowe and Susan Collins decided to break rank with their GOP colleagues by supporting cloture, Senate Majority Leader Harry Reid (D-NV) was unable to keep his caucus in line, ultimately losing the votes of both Maria Cantwell (D-WA) and Russ Feingold (D-WI). In a parliamentary maneuver, Reid switched his vote in order to reconsider the cloture motion at a time that has yet to be determined.

Both Reid and Senate Banking Committee Chairman Christopher Dodd (D-CT) must now return to the negotiating table in order to establish a timeline for the consideration of additional amendments. Until then, the magic number of 60 remains elusive.

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Senate Majority Leader Harry Reid (D-NV) has teed up a critical vote today at 2 p.m. on the motion to invoke cloture, or limit debate, on the financial regulatory reform legislation, representing the first major step in wrapping up nearly a month of Senate debate.

If cloture is invoked—and Reid says he has commitments from Republican senators in order to garner the necessary 60 votes, despite the cries of a handful of Democrats who are seeking additional floor time for the consideration of their amendments—the Senate will likely vote on final passage of the Restoring American Financial Stability Act of 2010 (S.3217) on Friday.

Although the filing deadline for amendments has passed, Senate Banking Committee Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) continue to negotiate a resolution to the remaining amendments that have been offered by senators on both sides of the aisle. Reportedly, Dodd has now approved roughly 40 amendments that will be incorporated into a single manager’s amendment that will be offered this week.

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After wrapping up another eventful voting week that involved the consideration of nearly 15 amendments to the Restoring American Financial Stability Act of 2010 (S.3217), the Senate – and perhaps the Congress – now appears headed towards the finish line on financial regulatory reform.

Despite the numerous votes, Senate Banking Committee Chairman Christopher Dodd’s (D-CT) overhaul legislation escaped relatively unscathed from problematic amendments that could have disrupted future conference negotiations with the House, as a flurry of proposals – including those related to credit rating agencies, Fannie Mae and Freddie Mac, community banks, oversight of the Federal Reserve’s monetary policy, underwriting standards, the newly-created consumer financial protection bureau (CFPB) and interchange fees – all were brought up for consideration (see below for additional details on amendments). When the chamber returns to action next week, Senate Majority Leader Harry Reid (D-NV) is expected to set up a vote that will occur on Wednesday to invoke cloture – or limit further debate to 30 hours – which if approved, would likely lead to the bill’s final passage later in the week. Some sources around Capitol Hill are even predicting that after the Senate completes its work, House Financial Services Chairman Barney Frank (D-MA) and fellow Democrats will push for House passage of the Senate bill, precluding the need for a formal conference and ultimately shortening the timeline for the President’s signature.

But predictions aside, Dodd must still contend with the burgeoning frustration of his Democratic colleagues in the Senate, who expressed dismay this week that only 31 amendments out of the over 300 introduced have been formally debated on the floor thus far. In addition, particular contention still lingers with respect to the legislation’s provisions regulating derivatives transactions, specifically the scope of the bill’s "commercial end-user" exemption and its prohibition on commercial banks and bank holding companies from directly engaging in derivatives transactions. The Senate rejected, 39-59, a Republican derivatives proposal offered by Senators Saxby Chambliss (GA), Richard Shelby (AL), Judd Gregg (NH) that sought to limit the types of swaps transactions that would face clearing requirements by exempting “bona-fide hedging swap transactions.”
 

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Following a nearly three-day logjam, the Senate is now voting , and voting often, as leaders on both sides continue to queue up a broad array of amendments dealing with nearly every component of the Restoring American Financial Stability Act of 2010 (S. 3217).

Yesterday, the Senate jumpstarted the amendment process by passing overwhelmingly two proposals aimed at ending “Too Big To Fail” through modifications to the bill’s resolution authority language. The first amendment, offered by Senator Barbara Boxer (D-CA), attaches language specifying that “no taxpayer funds shall be used to prevent the liquidation of any financial company”; and the second amendment, offered by Senators Christopher Dodd (D-CT) and Richard Shelby (R-AL), removes the controversial $50 billion fund that would have been used to finance the resolution of failing financial institutions and would limit the payments received by creditors during liquidation. The Boxer amendment passed by a vote of 96-1 and the Dodd-Shelby amendment was approved 93-5.

Although both parties were able to resolve the “Too Big Too Fail” dilemma relatively peacefully through closed door negotiations, the gulf between Democrats and Republicans over a contentious proposal to create a new consumer financial protection bureau (CFPB) may prove to be more difficult. At some point today, the Senate is expected to consider an alternative GOP proposal offered by Shelby and Senate Minority Leader Mitch McConnell that would, as opposed to the current Dodd proposal that places the CFPB within the Federal Reserve, put the new bureau inside the FDIC and grant its board with significant oversight authority over the bureau's rulemaking decisions. The Shelby-McConnell proposal would also limit the bureau’s authority to that of rulemaking, as banking regulators would retain their enforcement and supervisory authority. But nonetheless, the GOP alternative’s prospects of passage are dismal by most accounts.

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

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

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

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

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

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

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In the eyes of Senate Democratic Leadership, the writing is on the wall. A recent poll shows that nearly two-thirds of Americans support reforms to the financial industry and a majority of those voters trust President Obama over Republicans in getting the job done. And now, following a series of tactical maneuvers this week that forced Senate Republicans into voting not once, twice, but three times against moving forward with the debate on financial regulatory reform, Senate Majority Leader Harry Reid’s (D-NV) next play appears simple: ride the populist wave against Wall Street all the way to November.

Beginning next week, the Senate will begin formally debating and considering amendments to the Restoring American Financial Stability Act of 2010 (S.3217)—a process likely to consume at least two weeks of floor time. Reid’s announced timeline of Memorial Day for completion of S.3217, coupled with President Obama’s new goal of September for the signing of a final bill, provide a clear indication that Democrats are looking to financial reform as a signature issue in the 2010 elections.

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Fresh off a newly-brokered compromise between Senate Banking Committee Chairman Christopher Dodd (D-CT) and Ranking Member Richard Shelby (R-AL), Senate leaders announced this evening that both sides have unanimously agreed to begin debating the Restoring American Financial Stability Act of 2010 (S.3217) – officially putting an end to nearly three days of legislative stalemate.

Although details of the Dodd-Shelby compromise language – which reportedly only changes provisions related to eliminating taxpayer bailouts of large and interconnected financial institutions -- have yet to be unveiled, a senior GOP aide said it amounted to “huge concessions” by the Democrats, and ultimately led to the Republicans' final decision to move debate on the broader legislation forward. The Senate made progress tonight in spite of the fact that two other major areas of contention -- derivative regulation and the powers of a newly-created Consumer Financial Protection Bureau (CFPB) -- remain unresolved.

Beginning on Thursday, the amendment process will kickoff with the consideration of a Dodd-Lincoln substitute amendment.  Particular attention will be paid to the derivative language, especially whether or not a broader exemption should be provided for "end-users " and also whether or not banks will be forced to spin-off or “wall off” their swaps operations -- a proposal that is currently opposed by Republicans, the Federal Reserve, a few Democrats (including New York Senator Kirsten Gillibrand and Virginia's Mark Warner), and even some in the Obama Treasury Department.

Both Republicans and Democrats are expected to introduce a laundry list of amendments in what Senate Democratic leadership pledges will be an open process.
 

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

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

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

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

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

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

Stay tuned for the results.

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Tonight the Senate Democratic leadership was unable to get the 60 votes necessary to advance comprehensive financial regulatory reform legislation (S. 3217). The motion to proceed to the bill failed by a vote of 57-41. Sen. Ben Nelson (D-NE) was the lone Democrat to vote with the united Republicans. Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Minority Member Richard Shelby (R-AL) continue to work behind the scenes toward a compromise package that could attract more than 60 votes. At the same time, Senate Republicans are rumored to be drafting a Republican alternative to the Banking Committee-passed bill. Senate Majority Leader Harry Reid (D-NV) can move to reconsider tonight's vote -- i.e. a do-over -- at any time, but he is not likely to do that until he has secured at least 60 votes.
 

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

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Today the Senate Agriculture Committee, led by Chairman Blanche Lincoln (D-AR), completed its work on the over-the-counter derivatives section of financial regulatory reform. By a vote of 13 to 8, the committee adopted the Wall Street Transparency and Accountability Act. Sen. Charles Grassley (R-IA) was the only Republican to join the committee Democrats in voting for the bill.

The Senate is set to vote to end the filibuster on the Senate Banking Committee bill next Monday evening, which would allow Banking Chairman Chris Dodd (D-CT) to bring the legislation to the floor next Tuesday, April 27. The Monday night vote is dependent on getting at least one Republican to break ranks and vote for cloture, which would end the delay. No one knows which Republican will cave, but some likely candidates are the moderate Senators from the Northeast: Olympia Snowe (R-ME), Susan Collins (R-ME), or Scott Brown (R-MA).

We expect Sen. Dodd to incorporate Lincoln’s Wall Street Transparency and Accountability Act into the financial reform package he brings to the floor. Following are a few shorthand highlights of the Lincoln bill, but click here for the Senate Agriculture Committee’s more extensive summary and the most up to date bill language.

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Following financial regulatory reform's path in the Senate may require a scorecard. This coming Monday, Senate Banking Committee Chairman Chris Dodd (D-CT) plans to file his committee's report on the legislation it adopted before the spring recess. Sen. Majority Leader Harry Reid (D-NV) announced that the Senate will begin floor debate on the bill starting next week. Meanwhile, Senate Agriculture Committee Chairman Blanche Lincoln (D-AR) today unveiled her much anticipated derivatives bill, which her committee will markup next week. Reportedly, the current Lincoln bill does not reflect the negotiations she has been having with her Republican counterparts, and the legislation is likely to change significantly during next week's markup. Of course, the Agriculture Committee markup could end up like the Banking Committee markup with no amendments and a party line vote. It is too early to predict, but President Obama's threat today -- that he would "veto legislation that does not bring the derivatives market under control" -- signals that the White House is not looking to compromise.

Earlier today, it looked like Democrats would have been able to entice at least one Republican to help them break a possible filibuster next week. By this afternoon though, all 41 Republican Senators sent a unified letter to Reid opposing the Banking Committee bill and asking for support for the bipartisan negotiations several Senators have continued conducting.

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

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

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This afternoon at 5 p.m. the Senate Banking Committee will meet and likely adopt along party lines Chairman Chris Dodd's "Manager's Amendment" to his financial regulatory reform draft unveiled earlier this month. Instead of dedicating a week or more to consideration of the 473 amendments filed by committee members -- 98 of which were filed by Sen. Bob Corker (R-TN) -- Dodd decided to incorporate a fraction of the amendments into one roughly 100-page package and then move the bill swiftly and successfully out of committee.

Corker said this morning that he was disappointed about the process, since he had hoped to work through many of the issues in a bipartisan fashion within the Banking Committee.  Assuming things go as predicted tonight, many compromises to the bill will be worked out behind the scenes prior to floor consideration, while still other issues will play out on the Senate floor.

Corker still believes the bill has a 90 percent chance of passing ultimately and thinks that there may be a "better opportunity with a different cast of characters -- the full Senate -- to do something policywise."
 

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

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

Below are the bill’s highlights:

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

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

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

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

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Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) continue to work towards bipartisan agreement on at least some key elements of a financial reform measure. While the process has been a rocky one, both Senators appear to be working hard to find common ground. They appear to have found agreement on at least two things:

1. There will NOT be a stand-alone Consumer Financial Protection Agency.  Rather, consumer protections functions will be folded into another agency or agencies.

2. The president's proposal to limit the size of financial institutions (the "Volcker rule") has complicated the process and may have come too late in the game.

Our contacts on the Hill are telling us to expect committee action on a financial reform package by the end of the month. Regardless of the final outcome of the Dodd-Shelby discussions, the Chairman appears committed to moving ahead.

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That is the recent refrain of Senate Banking Committee Republicans when asked about the financial services regulatory reform bill now pending in the Senate.

While Republicans have expressed continued willingness to work with committee Democrats to develop bipartisan legislation that would address the root causes of the recent financial crisis, they appear in no hurry to pass a bill—and certainly not what they consider a “bad bill”—just for the sake of having a bill.

As a whole, Senate Banking Committee Republicans think the Dodd bill and the House-passed reform bill go too far. Chairman Chris Dodd (D-CT) seems well aware of that fact and, as reported previously, has constituted numerous working groups to hammer out the various issues. Those groups are currently working together to resolve outstanding issues, with varying degrees of progress.

While the committee has been expected to mark-up its version of the financial reform bill in February, that schedule will depend upon the level of progress and bipartisanship the committee is able to achieve. One major stumbling block has been the establishment of a new Consumer Financial Protection Agency (CFPA)—a signature issue of the Obama Administration. Chairman Dodd has reportedly expressed a willingness to move away from the CFPA in a favor of giving more consumer protection authority to existing prudential regulators—a position also favored by committee Republicans.

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Sen. Banking Committee Chairman Chris Dodd's (D-CT) announcement that he will not seek re-election has roiled the already choppy waters surrounding the financial reform legislation. The Financial Reform Watch team has been intrigued by the comments attibuted to congressional and industry sources indicating that his retirement may increase the opportunity for a bipartisan bill. We are not so sure.

While we would all like to think that respect for a departing colleague and the desire of Senators to help him cement his legacy would result in more cooperation, there is little evidence to suggest today's Senate operates on that principle. We need only look back as far as the consideration of health care reform to support our view. Early in 2009, many thought the illness of Sen. Ted Kennedy would spur Senators to help him achieve his goal of more than 30 years to achieve health care reform. After his death, there was even more talk of how Senators might be moved to seek accommodation in his memory. Clearly, those sentiments—if they ever existed—were overwhelmed by the deep partisan divide in the Senate.

Today, those who indicate that bipartisanship might emerge in the wake of Dodd's announcement seem to believe he will be more accommodating of GOP concerns over certain issues—particularly the creation of the Consumer Financial Protection Agency. Our contacts on the Hill suggest that creation of that agency is as close to non-negotiable for the Administration and Sen. Dodd, not to mention House leaders, as any issue in the package. If the price of GOP support for the bill is dropping that, we are doubtful we will see much bipartisanship.

So our assessment is that is is too early to say whether Dodd's retirement improves or diminishes chances for a bill to be enacted. Your FRW team will be monitoring the situation closely and will keep you apprised of developments.

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

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

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

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

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

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

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While Senate Banking Committee leaders Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL) have been engaged in a public display of bipartisanship about shaping comprehensive financial services reform legislation, it appears difficulties are arising in finding common ground on key issues. What we hear on Capitol Hill is that development of a detailed legislative proposal is now taking place almost exclusively on the Democratic side. GOP involvement has been minimal in recent weeks as Sen. Dodd's team seeks to pull together a draft piece of legislation.

The earlier goal of releasing a bipartisan draft in October and having a committee markup soon thereafter is proving elusive. Committee staff continues to work on a comprehensive measure including the controversial Consumer Financial Protection Agency (CFPA) and—one way or another—we expect something to emerge from that process in the next few weeks. Key committee members believe the CFPA is the one thing on which the Administration will draw a line in the sand, so opponents of that agency should not expect any early "give" on that front from the Democratic side. The major issues on that topic will center on the scope of the agency's authority and the powers it will have.

The issue of systemic risk regulation is under active discussion at the committee and it appears unlikely the Fed will be given that role. One indicator of the Fed's unpopularity at the committee these days is that there appears to be some reticence to move quickly on re-confirmation hearings for Fed Chair Ben Bernanke. Committee leaders would like to avoid hearings that might color the committee's deliberations on financial reform legislation. So even though his term is up at the end of the year, we would not be surprised to see Bernanke's reconfirmation delayed until after the New Year. He can stay in office beyond the expiration of his term, so there is no burning need to get the process completed right on time.

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

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

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

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

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

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Even Cabinet Members (maybe ESPECIALLY Cabinet Members) need an August break. Various media outlets have reported that Treasury Secretary Geithner delivered an expletive-laced tirade to the principal U.S. financial regulators during a meeting last Friday, in what sources say was a clear show of frustration over the internal opposition to some key elements of the Obama administration's financial regulatory proposal.

Fortunately, for inquisitive lawmakers, several of the meeting attendees were on Capitol Hill today to testify before the Senate Banking Committee on “Strengthening and Streamlining Prudential Bank Supervision,” including Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair, Federal Reserve Governor Daniel Tarullo, Acting Director of the Office of Thrift Supervision (OTS) John Bowman and Comptroller of the Currency John Dugan.

Confirming the veracity of the reports, the regulators were also unwilling to soften their criticism, as Bair and her fellow regulators expressed sharp resistance to the administration's proposal to consolidate the bank supervisory functions of the OTS and the OCC into a new National Banking Supervisor -- citing concerns that unified regulation would undercut the interests of community banks and would do little to close the most glaring regulatory gaps that occurred in the non-bank, or "shadow," banking system.

After hearing from the witnesses, Senate Banking Committee Chairman Chris Dodd (D-CT) openly speculated about the administration's plan, commenting that it is “…a thoughtful proposal but I wonder if it is the right prescription.”  Then again, Dodd’s comments may offer more insight on where his mind has focused these past several weeks than about the financial reform outlook.

The House adjourned last Friday and the Senate will adjourn this Friday for the August recess. Dodd is going home to face some challenging poll numbers as he gears up his 2010 re-election campaign. The opinion landscape is shifting rapidly, and legislators may come back in September with some different notions than they left with in August. One thing is for certain, it is going to be a very busy fall.

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

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

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

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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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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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The International Monetary Fund’s (IMF) call earlier this week for Europe to conduct stress tests on individual banks has again put the solvency of European banks and the EU’s efforts to clean up bank balance sheets into the spotlight. The solvency ratios of European banks are often lower than those of their US counterparts, making them more vulnerable to write-downs and requirements to raise further capital. The IMF likened the stress tests to a good “spring cleaning.”

Most estimates show that European banks still have significant write downs ahead of them, which in turn will make further government interventions necessary. For instance, the Belgian government on Thursday had to step in to help its troubled banking sector by offering guarantees to KBC Bank. The measure became necessary through the possible default of MBIA Inc, the New York-based bond insurer.

However, European banks argue that US-style stress tests are less applicable to their institutions, because the economic fundamentals and accounting rules are different. The EU officials are also satisfied that individual national regulators have long been conducting stress testing and that there is no need to make them public.

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

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

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

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

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

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

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

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

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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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This morning’s Senate Banking Committee hearing was still continuing as the Bush Administration, House Banking Committee Chairman Barney Frank (D-MA), and House leadership were making plans for an urgent briefing today at 4 p.m. to convince House members to agree to the Treasury’s Troubled Asset Relief Program (TARP). Press reports about this morning’s House Democratic and Republican conference meetings characterized members’ reactions as “resistant.” Our sources on the Hill and off are saying the meetings were worse than reported, and the mood at both was antagonistic. As of now, the House does not have anywhere near the 218 votes needed to pass the Treasury plan, even with Chairman Frank’s endorsement.

Members of the Senate Banking Committee, including Sen. Chuck Schumer (D-NY), questioned whether the TARP could be funded in installments, precluding the need for Congress to authorize $700 billion in one lump sum. However, both Federal Reserve Chairman Bernanke and Paulson rejected the suggestion, saying that bolstering consumer confidence requires Treasury to have the full $700 billion authority, even if they do not utilize the entire amount. Both Paulson and Bernanke repeated on several occasions that lawmakers must not view the $700 billion as an expenditure, but as an investment that would be recovered – though perhaps not in full – over time.

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While congressional leaders and the Administration continue to make progress in developing a compromise $700 billion package to shore up the financial markets, this morning’s news is that skeptics in both parties are making their voices heard very strongly. This skepticism is not likely to derail the plan altogether, but it may slow its path to enactment.

Events in public and in private this morning have brought out the opponents of Secretary Paulson’s plan. A public hearing at the Senate Banking Committee began at 10 a.m. this morning and continues as this is written. At the hearing, Fed Chairman Ben Bernanke emphasized the importance of quick action on the plan. He said financial institutions continue to be at risk and the pending plan will be important to staving off further failures. Secretary Paulson pressed again for a “clean” piece of legislation (meaning with minimal add-ons) but also telegraphed some flexibility on issues like oversight and mortgage assistance for homeowners. Members of the committee from both sides of the aisle hit the Administration hard for pushing a plan that appears to be a “blank check” for the Treasury Secretary.

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