Senate Dems Push Reform Through Banking Committee
The panel took the action after committee Republicans withdrew hundreds of amendments they had filed, electing to save their fight on the bill when the full Senate takes up the more than 1,300-page legislation after the Easter recess.
Instead, the brief "mark-up," which was held at 5:00 p.m. Monday, consisted primarily of Senate Banking Committee Chairman Christopher Dodd, D-Conn., and Ranking Member Richard Shelby, R-Ala., making opening statements about the need for financial services regulatory reform.
Since 2007, when the worst financial crisis since the Great Depression began, "Some of the most prominent financial institutions in our nation have been destroyed or seriously weakened," Dodd said. In March 2008, Bear Stearns collapsed and was sold in a fire sale to JPMorgan Chase. Lehman Brothers' collapse followed in September 2008, becoming the largest bankruptcy filing in U.S. history, with over $600 billion in assets.
Yet, "The far worse damage has been done to millions of our fellow citizens, ordinary families across the nation, who did nothing wrong but are paying a terrible price for this terrible crisis," Dodd said, citing the loss of 8.4 million jobs and almost 7 million foreclosures, along with huge losses to retirement funds.
"Americans are frustrated; they're angry about what's happened and they want answers," Dodd said. "How could this have happened, and what are we going to do to make sure it doesn't happen again?"
Shut Down Failing Firms
Dodd claimed that the bill, which he authored, would end bailouts, ensuring that failing firms would be shut down without taxpayer funding or threatening economic stability. To do that, financial firms would be discouraged from growing too large through strict rules for capital, leverage, liquidity and risk management. Proprietary trading that only profits a financial services firm could not be conducted by banks that take federally backed deposits.
The Financial Stability Oversight Council also would be tasked with serving as an early warning system to spot unsafe financial institutions, products or practices before they threaten the stability of the economy.
A Consumer Financial Protection Bureau would be created within the Federal Reserve Board with an independent head and an independent budget, to protect consumers from unsafe products such as subprime mortgages that helped lead to the financial crisis.
Exotic financial instruments such as hedge funds and derivatives would face more regulation and open disclosure requirements.
Dodd pledged that the bill would "restore our financial security, so that our economy can create jobs and offer middle-class families the chance to build wealth."
While there will be a "spirited debate" in the weeks ahead on the bill, "We are moving forward on this issue," Dodd said. He predicted that financial services reforms would be adopted this year.
Shelby was conciliatory, predicting that Democrats and Republicans will try to come to an agreement, as they had unsuccessfully attempted to do until recent weeks, when Dodd moved to go ahead with a Democratic-backed measure. He pledged to continue to work with Democrats as the bill goes to the floor "in hopes or reaching a broad consensus."
Shelby outlined areas of common agreement between Democrats and Republicans, including a desire to end the concept of "too-big-to-fail" financial institutions that the markets assume the government will back financially if necessary. Although the bill approved today takes some steps in the right direction, it still falls short of getting away from bailouts, he said.
Shelby commended the Financial Stability Oversight Council, which he said would strengthen the financial system and improve financial regulation.
The regulatory structure needs to be modernized and streamlined, and the scope of the Federal Reserve's authority should be closely examined, consumer protections need to be strengthened, and derivatives trading needs to be made more transparent, standardized and competitive, Shelby said.
"These broad areas were, and I believe remain, the foundation of bipartisan legislation," Shelby said, adding that a bipartisan agreement is still not out of reach. "I do not view today's markup as the end of the road, but rather just another step in the process."
Regulatory Structure Imbalance
Noting that the controversial Consumer Financial Protection Bureau has received the most public attention, Shelby said that there is an "imbalance in our regulatory structure between consumer protection and safety-and-soundness regulation." But he said consumer protection should be elevated to the same level of importance that banking regulators give to the safety and soundness oversight of banks.
"While I continue to believe that a safe and sound banking system is the best consumer protection, there are steps that need to be taken to strengthen the role of consumer protection," he said.
Market expectations regarding bailouts need to be changed, private sector due diligence must improve, and regulators must be given realistic objectives and the tools to achieve them, Shelby said.
He was most critical of regulations in the bill that would subject derivatives transactions to reporting, clearing and execution requirements. Companies that use derivatives to hedge legitimate business risks would be subject to the new requirements, unless they qualify for narrow exemptions under the bill.
Jumping Through Hoops
Companies should able to use swaps to hedge business risks without being required to "jump through unnecessary regulatory hoops, or have to set aside resources that could otherwise be used to create jobs and develop new products," Shelby said.
"Forcing clearing to essentially all derivatives ignores the risk of central clearing," Shelby said, warning that that could expose taxpayers to the risk of future bailouts of clearinghouses. "We need to carefully weigh the risk of mandating the clearing of products that are complex, illiquid, and hard to price," he said.
Regulators need access to all information about the full range of activities in the derivatives markets, but the bill allows some types of swaps to continue to be transacted without full transparency, Shelby charged.
Corporate governance provisions in the bill, such as giving shareholders more say on executive pay and allowing shareholder votes on corporate directors, are unrelated to the crisis and would "impose costs on shareholders and empower special interests," Shelby said.
Shelby also said that more needs to be done to address problems with credit rating agencies, securitization and funding of the Securities and Exchange Commission. The bill would allow the SEC to keep the transaction and filing fees it now collects, which would increase its funding significantly and provide it with a budget that Congress wouldn't have to approve through the annual appropriations process.