I’m sure most of you remember that I labeled the Baucus version of HCR BARF (Baucus Against a Real Fix). I’ve decided to label Dodd’s financial regulation bill DARE, but more on that later. The bill is not all bad.
…The idea for a consumer panel grew out of the writings of Elizabeth Warren, a Harvard University bankruptcy law professor who now heads a special Congressional Oversight Panel to oversee how taxpayers’ bailout dollars are spent.
Warren and other consumer advocates objected to some parts of Dodd’s approach, such as letting banks with assets of less than $10 billion escape regulation by the new panel, and giving some veto power to financial regulators over the consumer unit. However, Warren praised Dodd’s bill overall.
"Despite the banks’ ferocious lobbying for business as usual, Chairman Dodd took an important step today by advancing new laws to prevent the next crisis. We’re now heading toward a series of votes in which the choice will be clear: families or banks," Warren said in a statement.
Gail Hillebrand, a director of Consumers Union, the publisher of Consumer Reports magazine, said tougher language is still needed.
"We need a government watchdog with real authority to protect consumers. Lawmakers should strengthen the Dodd proposal by making sure that the banking regulators who failed to prevent our current financial crisis can’t stand in the way of needed consumer protection," she said.
The Senate bill differs from the House version in how it would guard against risks to the broader financial system. The House bill would grant broad new powers to the Federal Reserve to police the entire financial system for risks.
Dodd’s bill calls instead for a nine-member Financial Stability Oversight Council, to be chaired by the Treasury Department with other members drawn from other financial regulators, to watch out for risks. It would make recommendations to the Fed for strict rules to prevent banks from growing so large that their failure would pose a risk to the financial system. The September 2008 collapse of Lehman Brothers and subsequent rescue of insurer American International Group heightened attention to this concept of financial firms being "too big to fail."
Dodd’s bill would broaden the Fed’s powers over large banks, with assets greater than $50 billion, and would allow it to regulate big non-bank institutions such as AIG.
Before the newly empowered Fed would be permitted to break apart a financial institution it deemed "too big to fail," two-thirds of the nine-member oversight panel would have to approve.
Given that regulators failed to communicate effectively among themselves before the crisis, there’s skepticism about the umbrella approach now.
"Each of the agencies has their particular mindset that they bring to the table. It doesn’t stick the authority in one place and say ‘you’re responsible for this,’" said Kevin Jacques, a 14-year veteran of the Treasury Department.
Like the House, the Senate bill would create a fund, paid for by banks, to cover the cost of dissolving large financial institutions. The House calls for a $150 billion fund; Dodd, for a $50 billion fund.
The Senate bill goes further than House legislation in attempts to rein in large, complex financial institutions. Dodd largely adopted a proposal from former Fed Chairman Paul Volcker, now an adviser to Obama, to prevent large institutions from trading in their own funds if they also trade on behalf of clients.
Under the Dodd bill, regulators would issue rules to prevent banks and bank holding companies from owning a hedge fund, private equity fund or from conducting proprietary trading… [emphasis added]
Inserted from <McClatchy DC>
There are considerable differences between the three versions of the Consumer Financial Protection Agency (CFPA), as this table from Think Progress shows.
Provision |
Senate Bureau of Consumer Protection |
House Consumer Financial Protection Agency |
Administration Consumer Financial Protection Agency |
Presidentially Appointed Director |
Yes, confirmed by the Senate. |
Yes, confirmed by the Senate. |
Yes, confirmed by the Senate. |
Independent source of funding |
Yes, from the Federal Reserve Board budget. |
Yes, from the Federal Reserve Board budget. |
Yes, with fees on “entities and transactions” within the financial system. |
Rule-making Authority |
Writes rules, but rules can be vetoed by a two-thirds vote of a newly created council of bank regulators. |
Full rule-making authority. |
Full rule-making authority. |
Covering Non-Bank Financial Firms |
Rules apply to all banks, non-bank home lenders, and other “significant” non-banks. |
Rules apply to all banks and non-banks, with some select exemptions (auto dealers, for example) |
Rules apply to all banks and non-banks |
Enforcement Authority |
Only enforces rules for banks with more than $10 billion in assets. All others are overseen by their current regulator. |
Only enforces rules for banks with more than $10 billion in assets. All others are overseen by their current regulator. |
Full enforcement responsibilities. |
Now for my critique.
Preventing large banks from trading in their own funds is a good idea.
Preventing banks and bank holding companies from owning a hedge fund or private equity fund, and preventing them from conducting proprietary trading is a good idea.
Placing the CFPA under the Federal Reserve is like making the Henhouse Protection Agency a division of Fox, Inc. Funding it through the Federal Reserve gives Banksters the ability to starve the CFPA to the extent that it cannot perform it’s function. Giving the Financial Stability Oversight Panel (FSOP) veto power (with a 2/3 vote) over CFPA rules could emasculate the CFPA. Banksters have a proven talent to get their lackeys appointed to key regulatory posts. Should they gain control of the FSOP, as they surely would in a Republican regime, any consumer protection measure could be artificially deemed a threat to financial stability. Rules must apply to all banks and non-banks. Otherwise Banksters will spin-off non-regulated subsidiaries. The CFPA must have full enforcement authority. Allowing banks with less that $10 billion in assets leeway to rip-off consumers makes no sense.
This bill approaches TBTF from the wrong direction. While it is good that it provides for the orderly dissolution of a failed institution to prevent another taxpayer bailout, Banksters can still create new bubbles. Those bubbles can still burst and cause significant damage to our economy. Banksters can still escape the meltdown with their pockets full of cash. Taxpayers will still be left paying for the damage done to the economy, before the meltdown occurred. In short the bill ignores the a basic principle. Too big to fail is too big to exist.
Finally we come to my label, DARE: Derivatives Aren’t Regulated Either! While some derivatives are beneficial to a market, it was the improper use of derivatives, such as credit default swaps, that nearly bankrupted the nation. Banksters have already returned to high-stakes speculation in derivatives, conducted on private exchanges, out of sight of federal regulators. According to Wikipedia, there are currently $684 trillion in outstanding privately traded derivatives. This is over 50 times our GDP. Unregulated derivative trading is the greatest single threat our economy has ever faced, and this bill does not even touch the issue.
While the bill represents a step in the right direction, US financial stability demands a truly independent CFPA, the breakup of TBTF Banksters, and tight regulation of the shadow derivative market.
10 Responses to “Remember BARF? Meet DARE!”
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Call it a gut reaction but I just don’t trust anything coming from Chris Dodd concerning banks and banking simply because he is too close to them.
Mark, I share those sentiments and hope you are feeling better.
I have to agree with TWM. Secondly, his over the top attempts to make this a bi-partisan effort that leaned to the right was beyond my comprehension. Good post as always Tom. I learned a lot.
Thanks Mike. If Democrats had half a spine they would proceed immediately to a reconciliation bill.
I agree with TWM as well. Having the CFPA under either the Treasury or the Fed will make it powerless – it needs to be it’s own cabinet level agency, independent of the Treasury or Fed otherwise it will be powerless to protect the people and not enforce the rules on the banks. I don’t trust Dodd either – can’t he retire early – what a PITA (pain in the ass).
Lisa, I agree. CFPA must be an independent agency.
Here we go again. Another bill I do not like, but cannot refuse the good that is in it. As you stated, this bill does not address the greatest problem.Take what you can get when it is offered, but I can’t help thinking that continued half measures, is a painful way to progress.
You should know I was against the bailouts, both Bush’s and Obama’s.It would have made our situation worse, but would have been truer to capitalism and we don’t need the management practices that got us in this mess, to be the ongoing business profile.
A year later, the stock market is up, corporations are posting profits, it’s only the average American that is carrying the burden of this financial downturn.
We and our government are addicts to credit. Like most addicts, maybe we have to hit the gutter, before motivation for real change, is the only option.
Tom, painful indeed!
I think the bailouts were necessary, but the manner in which they were conducted was insane. Bailouts should have required divestiture to break up the TBTF banksters and stringent regulation and oversight.
Highly informative post, Tom. Appreciate it.
YVW, Anna.