Pushing Wall Street Reform Across The Finish Line

Last week, after three successful efforts by Senate Republicans to block the beginning of the final debate on Sen. Chris Dodd's (D-CT) Wall Street reform legislation, the chamber unanimously agreed to begin the process of commencing a 30 hour debate, filing amendments, and ultimately holding a vote. On Wednesday, the Senate began voting on a series of amendments, some aimed at strengthening and some aimed at weakening the legislation. Since they were unable to use "Senate committee hearings and backroom negotiations among key lawmakers to remove or soften what the financial industry considers most objectionable in the bill," lobbyists for the biggest Wall Street banks were "on edge" as the Senate prepared to "consider populist amendments that spell even more heartburn for the banks." At the same time, lobbyists were hoping that the amendment process would allow their Senate allies to insert loopholes into the legislation that would protect the status quo. The voting started with general consensus as an amendment to eliminate a $50 billion resolution fund by Sen. Richard Shelby (R-AL), which was the result of weeks of negotiations with Dodd, passed by a vote of 93 to 5. The fund had been the focus of unjustified GOP criticism that Dodd's bill would result in "permanent bailouts." The compromise to drop the fund emboldened progressive senators to "push aggressively for an array of proposals that could force some of the nation's biggest banks to reduce their size" and, as the Wonk Room's Pat Garofalo noted, forced Republicans to find other areas, such as consumer protection and derivatives reform, to focus their complaints.

PUSHING STRONGER PROTECTIONS: In April, the Senate Budget Committee held a vote on an amendment to the financial regulatory reform bill by Sen. Bernie Sanders (I-VT) that would have broken up some of the nation's largest financial institutions considered "too big too fail." Though Sen. John Cornyn (R-TX) paid lip service to the idea of limiting the size of the big banks, telling the Huffington Post that he preferred to make banks "smaller in order to avoid" the problems that arose during the financial crisis -- Cornyn voted against the amendment, helping to defeat it 10-12. Yesterday, the Senate took up a similar measure proposed by Sens. Sherrod Brown (D-OH) and Ted Kaufman (D-DE) that would have limited "large banks by capping at 10 percent the share of the U.S. total insured deposits it can hold, and restrict limits on leverage." Brown and Kaufman's amendment was "among the most deeply dreaded by Wall Street" and considered by the New York Times to be "the liberal amendment that could be hardest to defeat," but it ultimately was defeated 33-61. "This is certainly a defeat for those who are concerned about the dangers of financial concentration in this country," Kaufman said in a statement after the vote. "Some causes are worth fighting for, and for me, the concern about the risks 'too big to fail' banks pose to the American economy and people is deep and profound given the economic tragedy millions of American have endured." There is a populist amendment that is faring better. Initially, the Obama administration opposed Sanders' amendment allowing the Government Accountability Office to audit the Federal Reserve. The measure, which has bipartisan support, is now expected to pass as Sanders struck a compromise limiting the scope of the GAO's one-time audit to "a thorough review of all the Fed's emergency lending, beginning December 1, 2007." "We appreciate the work of Senator Sanders and Senator Dodd to work together on a strong amendment that ensures full and open transparency regarding emergency lending programs, without compromising the Federal Reserve's full independence with respect to the conduct of monetary policy," Deputy Treasury Secretary Neal Wolin said in a statement.

GOP ATTEMPTS TO EXEMPT: Though not the stand-alone Consumer Financial Protection Agency proposed by the Obama administration and passed by the House of Representatives, Dodd's legislation creates a Bureau of Consumer Protection inside the Federal Reserve that would directly examine and enforce rules for all banks, non-bank mortgage lenders, and other "significant" non-banks regulated by the Federal Reserve with more than $10 billion in assets. According to Center for American Progress Associate Director for Financial Markets Policy David Min, "Dodd's Bureau as currently constructed is a good one, but if any of its key features are watered down, even a tiny bit, it will quickly become a bad proposal." Yesterday, Shelby, with the backing of Minority Leader Mitch McConnell (R-KY), offered a consumer protection amendment aimed at doing just that by exempting most of the financial system from oversight. Shelby's amendment, which was defeated in a 61-38 vote, would have moved the new consumer protection division to the Federal Deposit Insurance Corp. that would have enforcement power over only "large non-bank mortgage originators." Shelby's division would have been powerless to take action against commercial banks, investment banks, credit card companies, car dealers, payday lenders, and non-banks that sell financial products other than mortgages such as AIG. Shelby's amendment also would have gutted the pre-emption approach in the current legislation. Dodd's bill, like the reform effort passed by the House last year, allows states to write stronger consumer protection laws than those set by the federal government (creating a federal floor for regulation, instead of a ceiling). The bill gives federal regulators the ability to preempt state law on a case-by-case basis. States like Georgia and New Jersey tried to reel in predatory subprime lending in 2002 and 2003, but federal bank regulators stopped them in their tracks. The banks and Shelby want full federal preemption of the states, so that they only have to focus on watering down laws at the federal level. Though some conservative Democrats are also in favor of blanket pre-emption, "[s]tate attorneys general from Iowa, Illinois and elsewhere have joined consumer advocates in opposing" the industry's changes.

DERIVATIVES OUT OF THE DARK: In April, Sen. Blanche Lincoln (D-AR), who chairs the Senate Agriculture Committee, introduced a comprehensive derivatives bill that was much tougher on Wall Street than originally expected. Lincoln's proposal not only brings derivatives -- famously called "financial weapons of mass destruction" by Warren Buffett -- out of the dark, but would also force commercial banks to spin-off their derivatives trading operations under a separate, independently capitalized roof. Lincoln's bill would place all standardized derivatives trades onto public exchanges, ending "over-the-counter" trades that occur between two parties without public information, thus allowing both investors and regulators to see what is going on in the market. Though this approach would help to avoid another AIG-type situation, in which a party makes derivatives trades with nothing to back them up, Republican senators, led by Sen. Saxby Chambliss (GA), have crafted an amendmentgets rid of the exchange trading mandate entirely, but gives regulators vast discretion to exempt trades from going through clearinghouses. Instead, Shelby says the bill will simply stipulate that "transactions will be 'made known' to regulators." According to the Wonk Room's Pat Garofalo, "At its core, the amendment is an attempt to leave the derivatives market as is: opaque, with a lack of information for investors looking for fair prices and regulators looking to enforce the rules." Even former Bush Treasury Secretary Hank Paulson thinks this is the wrong approach. Speaking to the Financial Crisis Inquiry Commission yesterday, Paulson said that that derivatives should be standardized and put on exchanges, and anything that is not standardized should have onerous capital requirements. "Such regulations will encourage standardization, promote transparency, and penalize excessive complexity with capital charges, thereby restoring these products to their proper function -- mitigating, not enhancing, risk," he said. that not only