Dodd Unveils a Massive Financial System Overhaul

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) took a major step forward with his attempt to reform the U.S. financial services industry today. He unveiled a 1,336-page bill that would change how the industry is regulated more dramatically than any time since the Great Depression.

Dodd's "Restoring American Financial Stability Act," which he released at a press conference today on Capitol Hill, would establish a new independent Consumer Financial Protection Bureau, prevent institutions from becoming "too big to fail" and give shareholders nonbinding votes on executive compensation, among other things.

Dodd noted that it was two years ago that the 75-year-old Bear Stearns collapsed, followed by the Lehman Brothers bankruptcy on Sept. 15, 2008. The crisis that began then has claimed "millions of jobs, millions of dollars in private savings and trillions of dollars in American wealth," he said. Some 8.4 million jobs have been lost, and nearly 7 million homes have been foreclosed during that time, Dodd noted, adding: "Americans are frustrated and angry. . . . They've lost faith in our markets, and they wonder if anyone is looking out for them."

He blamed the crisis on a "longstanding failure of a regulatory structure to adapt to a changing financial system and prevent the sort of dangerous risk-taking that led us here."

A New Consumer Agency

Perhaps the most controversial provision in the bill, the Consumer Financial Protection Bureau, would be housed within the Federal Reserve Board, but it would have an independent head appointed by the president and approved by the Senate, and an independent budget. The agency would have the power to regulate mortgage businesses, nonbank financial companies like payday lenders and debt-collection agencies, and banks and credit unions. Chief targets of the agency's regulatory mission would be credit card rates, banking overdraft fees and payday lending practices. A council made up of other financial regulators could override CFPB regulations by a two-thirds vote.

Dodd said that the legislation would also end bailouts of institutions that are deemed "too-big-to-fail." "Never again should the American taxpayer be asked to write a check because of an implicit guarantee that the federal government will bail out a company [whose collapse] would threaten the stability of the economy as a whole. Companies simply shouldn't be that big or that complex. It isn't safe for our nation," he said.

Capital requirements and other strong supervisory protections would be designed to discourage such concentrations of power, and when large companies do fail, they would shut down through bankruptcy or resolution, under Dodd's plan.

A systemic risk council would have the job of identifying unsafe products or practices that could threaten economic stability, and it would be given the power to stop such practices. Goldman Sachs (GS) and Morgan Stanley (MS), which became banks during the financial crisis, could not change their status to avoid Fed oversight under the bill. The bill also provides regulators with guidance to restrict proprietary trading by depository institutions, a measure similar to what President Obama has called for.

Getting Republican Support?

The bill also would require transparency to exotic financial instruments, such as derivatives, and "insane" compensation packages that encourage short-term profiteering would be reined in, Dodd said.

While the senator has abandoned earlier attempts to get bipartisan consensus on the legislation, he expressed optimism that some Republican support will be forthcoming for measures in the bill dealing with resolution authority and derivative regulation.

The bill would create a new program at the Securities and Exchange Commission to encourage whistleblowers who expose wrongdoing at firms. It would also impose more accountability on the credit rating agencies that failed to detect major problems at financial institutions. And it would crack down on conflicts of interest at the Federal Reserve by making the head of the New York Fed a presidential appointee instead of being hand-picked by bankers that the Fed regulates.

Despite Republican pleas to take more time to come up with a bipartisan consensus bill, Dodd said little time is left in this Congress, adding that the Banking Committee will begin marking up the bill next week.

"We do need to act, and I will act," Dodd said, predicting that legislation would be enacted in this Congress.