Main Street

Dodd Pursues Sweeping Financial Regulatory Changes

A year ago Wall Street’s financial rupture sent the economy hurtling into a massive crisis, crushing tens of millions of Americans in an avalanche of unemployment, underemployment, home foreclosures, reduced incomes and lost benefits. That financial rupture was caused by a combination of rapacious, mindless greed on Wall Street, the then-bloated housing bubble, and the failure of both regulators and of the financial regulatory structure.

Tomorrow the Senate Banking Committee will begin to take up Senator Chris Dodd’s (D-CT) proposals for sweeping financial regulatory changes. In a statement announcing the proposed legislation last week, committee chairman Dodd said:

“Over the past year, Americans have faced the worst financial crisis since the Great Depression. Millions of Americans have lost their homes, their jobs, and their savings – and yet, they’ve watched some of the people and institutions that caused this mess collect million dollar bonuses and receive billion dollar bailouts.”

“Those hard working Americans are asking, what is the government doing to ensure their economic security?”

“It is the job of this Congress to restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them.”

“We must create a sound foundation to grow the economy and create jobs.”

“The financial crisis exposed a financial regulatory structure that was the product of historic accident, created piece by piece over decades with little thought given to how it would function as a whole, and unable to prevent threats to our economic security.”

“For decades, Washington has failed to deliver the substantial reform we need. If we fail again this time, our economy will be vulnerable to another crisis.”

Both the Obama Administration and the House Financial Services Committee have developed separate regulatory reform plans. But in the view of most observers, Dodd’s proposals would go much further in establishing a fundamentally new regulatory structure and in imposing tighter controls on financial institutions, investment instruments and trading practices — particularly for derivatives.

In a statement released by the Senate Banking Committee, and at his press conference, Dodd marked his determination to succeed with this major regulatory overhaul:

“I will not stand for attempts to protect a broken status quo, particularly when those attempts are made by some of the same special interests who caused this mess in the first place.”

“The American people have been through a lot over the past year. I hear from them every day. They are business owners forced to shutter their doors and lay off workers because their credit dried up. They are senior citizens who have delayed their retirement because their 401(k) vanished. They are ordinary Americans who did nothing wrong, but are paying a steep price. They deserve an economy in which Americans can find jobs, manage their money, and build better futures for their families. They deserve the real and meaningful change in this bill.”

Discussing two of the most critical components of his plan, Dodd continued:

“Our plan will stop abusive practices by creating an independent Consumer Financial Protection Agency with one mission: standing up for consumers. Whether taking out a mortgage, getting a credit card, or investing for retirement, Americans deserve to receive clear and accurate information, to be protected from hidden fees and abusive terms, and to know that the financial products they’re being offered are safe.”

“We will end “too big to fail.” We cannot allow the collapse of a few firms to threaten our entire economy. Our plan will create an independent council of regulators to identify risks, so that government can act to prevent a crisis. We will have a mechanism in place to safely shut down large failing companies without destabilizing the financial system. No longer will the Federal Reserve’s emergency lending authority be used to prop up a failed institution.”

Other key provisions would create a single federal banking regulator; eliminate regulatory gaps for over-the-counter derivatives, hedge funds, asset-backed securities, and payday lending; require companies that sell mortgage-backed securities to keep “skin in the game” so investors won’t be sold worthless securities; and give shareholders a greater say in how executives are compensated.

Not surprisingly, the two biggest defenders of the financial status quo are not at all happy with Dodd’s regulatory reform plan. The American Bankers Association immediately attacked the Dodd plan saying it “would tear apart the existing regulatory structure only to create a new one”. And the U.S. Chamber of Commerce has launched an effort to kill the proposed Consumer Financial Protection Agency (CFPA). These and other powerful special interests and financial industry lobbyists will no doubt be working feverishly to kill Dodd’s reform plan outright, or slice and dice it until its substantative provisions are eliminated or fundamentally weakened.

From the Senate Banking Committee’s summary (pdf) of those key provisions:

Consumer Financial Protection Agency: Creates an independent watchdog to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Prevents excessively large or complex financial companies from bringing down the economy by: creating a safe way to shut them down if they fail; imposing tough new capital and leverage requirements and requiring they write their own “funeral plans”; requiring industry to provide their own capital injections; updating the Fed’s lender of last resort authority to allow system-wide support but not prop up individual institutions; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Protects Against Systemic Risks: Creates an independent agency with a board of regulators to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the financial system. The agency could require companies that threaten the economy to divest some of their holdings.

Single Federal Bank Regulator: Eliminates the convoluted system of multiple federal bank regulators to increase accountability and end unnecessary overlap, conflicting regulation, and “charter shopping;” keeps in place the healthy dual banking system that governs community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations.

Closes Loopholes in Regulation: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Protects Investors: Provides tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.

The Senate Banking Committee website has links to the newly-released official summary of the Restoring American Financial Stability Act.

Tags: Chris Dodd, Consumer Financial Protection Agency, financial reform, financial regulation, financial regulatory reform