With reporting by Ryan Grim
Sen. Chris Dodd (D-Conn.) on Monday unveiled a sweeping financial regulatory reform bill designed to prevent future Wall Street bailouts and to protect borrowers with a Consumer Financial Protection Bureau housed at the Federal Reserve.
During a press conference at the Capitol, the chairman of the Senate Banking Committee emphasized the need for consumer protection, adding that the financial crisis and resulting recession were caused by predatory lending.
"The root cause of our economic crisis was a lack of consumer protection," Dodd said, emphasizing that the current regulatory structure is "hopelessly inadequate."
The consumer protection bureau would have authority to write rules governing all entities -- banks and nonbanks -- as well as the "authority to examine and enforce regulations for banks and credit unions with assets over $10 billion and all mortgage-related businesses," according to a summary of the bill.
President Obama praised the proposed bill, calling it "a strong foundation to build a safer financial system" and saying that it provides the government with "essential tools to respond in a financial crisis, so that we can wind down and liquidate a large, interconnected failing financial firm. It allows us to protect the economy and taxpayers so that we can end the belief that any firm is 'Too Big to Fail'."
Consumer advocates have been pushing for an independent protection agency and have opposed the idea of setting one up under the Fed. But bailout watchdog Elizabeth Warren, the foremost advocate for a strong independent agency, endorsed Dodd's proposal in a statement.
"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," she said. "We're now heading toward a series of votes in which the choice will be clear: families or banks."
Dodd sought to allay concerns about the consumer protection bureau being located at the Fed by emphasizing that it was a matter of "rented space in the Fed," adding that the Fed will have "not one iota of authority" (other than one vote on a nine-member council of systemic regulators with veto power over bureau rules).
"People are talking about control by the Fed. There isn't any control by the Fed," Dodd told HuffPost after the briefing. "But where else do you put it? I find there that you've got resources: you're going to be using Fed moneys to support it. No assessments involved, no appropriations process."
Dodd said that his set-up was the next best thing to an independent agency - and, in fact, better than a typical agency's assessment process, whereby a regulator is dependent on those it regulates for funding, and also better than a congressional appropriations process, where a regulator is subject to the whim of individual members of Congress who control certain purse strings.
"Let me tell you, it's a lot better to find resources through that mechanism than going through an assessment or an appropriations process. Look at the FTC [the Federal Trade Commission]. Look at Equal Employment Opportunity Office, what happens when you starve a budget. You can have all the wonderful laws on the books; if you don't have a budget that allows you to operate, you die. So the fact that it's at the Fed -- access to Fed monies -- in order to finance itself is far stronger than any other place it could possibly be, depending on an appropriations process or assessment process."
The consumer bureau would be funded by Fed money, said Dodd, but the Fed would not be able to deny it funds.
No Democrats on the committee so far have indicated they will oppose the bill if consumer protection is housed at the Fed, and a Democratic aide said there is no such plan. "People will likely work to strengthen the bill but there is a sense that Republicans dragged this out far too long already," the aide said.
Under Dodd's proposal, the consumer protection bureau would be led by an independent director appointed by the president and confirmed by the Senate. Its budget would be paid by the Fed, and its rule-making is subject to review by other regulators. According to the summary, the bureau "coordinates with other regulators when examining banks to prevent undue regulatory burden" and "consults with regulators before a proposal is issued and regulators could appeal regulations if they believe [sic] would put the safety and soundness of the banking system or the stability of the financial system at risk."
In addition, Dodd dismissed concerns raised by Republican lawmakers and bank lobbyists that consumer protection provisions could create conflict with regulators' mission to ensure the "safety and soundness" of banks: "I don't see these conflicts."
Not every consumer advocate is as accepting of Dodd's draft as Warren.
"It's terribly disappointing," said John Taylor, president of the National Community Reinvestment Coalition, in an interview with HuffPost. "It's a marked retreat from the original bill he proposed. You can keep using the word 'independent' all you like, but if the agency's independence is dependent on approval from the agencies to make its rules -- that doesn't make it independent."
Taylor said he was baffled by Dodd's decision in light of the senator's plans to retire. "I think he really does need to have a piece of legislation that probably will be the single most civil rights bill since the Voting Rights Act that can be his legacy," he said. "The Republicans aren't supporting him, so why put out a bill that takes their considerations in mind? It's like negotiating against yourself."
But the Center for Responsible Lending was much more praiseworthy of the effort. CRL President Michael Calhoun issued a statement, saying he "commends Chairman Dodd in crafting a financial reform bill that addresses the deceptive lending practices and regulatory failures that have caused millions of families to lose their homes, decreased access to credit for small business owners and cost state and local governments billions in lost revenue."
Consumer groups praised some parts of the legislation while expressing concern with other provisions in a conference call with reporters.
Heather Booth, executive director of Americans for Financial Reform, a coalition of nearly 200 groups pushing for reform in the banking and financial services industry, said that while her umbrella organization is generally supportive, the group is "concerned" about whether "the very problems that brought us to this crisis are actually resolved by the legislation."
Proposals strengthening shareholder power -- like giving shareholders of publicly-traded companies the right to a non-binding vote on executive pay -- were largely applauded. The creation of a new consumer agency was also cheered, as was a new federal authority to wind down failing megabanks and large financial firms (something regulators didn't do with Lehman Brothers, Fannie Mae, and Freddie Mac, among others).
But other provisions are worrisome, consumer advocates said. The independence of the proposed consumer agency was questioned, in part because its decisions could be overruled by a two-thirds vote by bank regulators.
Ed Mierzwinski, director of the consumer program for the National Association of State Public Interest Research Groups, said the new agency is somewhat weakened by a "burdensome rule-making process" regarding its authority to police payday lenders, for example. The proposed entity would have to go through the federal rule-making process in order to actually enforce its rules.
"Quite frankly, we don't know why we have to study whether or not to enforce laws over payday lenders," Mierzwinski said.
More problematic is that the bill allows for the federal bank regulator -- as opposed to the proposed consumer entity -- to determine which state consumer protection laws don't apply to national banks. Citibank, Bank of America, Wells Fargo and JPMorgan Chase are among the nearly 2,200 national banks and thrifts.
State consumer protection laws are often more stringent than those on the federal level, which is why so many consumer advocates have been pushing for federal rules and laws to be a "floor, not a ceiling" when it comes to consumer protection measures.
The current national bank and thrift regulators -- the Office of the Comptroller of the Currency and the Office of Thrift Supervision -- have preempted local and state consumer protection rules -- like those governing predatory lending -- for decades. The national bank regulator will continue to be able to determine which state laws national banks don't have to follow.
"We're disappointed that the bill gives the OCC any role in preempting state laws and does not fully restore the states' role in protecting consumers," Lauren K. Saunders, managing attorney for the National Consumer Law Center, wrote in an e-mail. "[W]e'd rather it be the [proposed consumer-focused entity], but even more we'd rather that states be allowed to protect consumers against new abuses before they become national problems that get federal attention."
The bill also creates for the first time a legal method to wind down failing large, systemically-important financial firms. This is an authority federal regulators consistently argue that they lacked during the financial crisis -- the reason, they cite, for using hundreds of billions of taxpayer dollars to bail out private banks and financial firms.
The method comes in the form of a special panel in bankruptcy court to wind down these firms. The panel will be composed of three judges from the U.S. Bankruptcy Court in Delaware, all hand-picked by the chief judge of that court.
To kill these struggling firms, the Treasury Secretary will have to petition the panel. After the failing firm files its response, the panel shall have no more than 24 hours to render its final decision. Any determination to wind down a firm will have to be supported by "substantial evidence."
The decision, though, can be appealed -- twice. The first appeal would go the U.S. Court of Appeals; the second would go to the U.S. Supreme Court. Both appeals could be filed up to 30 days after the previous panel's determination.
Some experts told HuffPost the 30-day appeal period could be problematic. A spokesman for Dodd did not respond to a request for comment left after regular business hours.
The bill also creates a $50 billion fund, to be paid by financial firms over time, to help resolve failing large, systemically-important firms. The FDIC, which already winds down failing banks, will be given authority to resolve these megafirms. It also will control the fund, which will be built up by assessments on firms levied over a 5-10 year period.
But if $50 billion isn't enough, the FDIC will have a backstop courtesy of U.S. taxpayers.
The bill provides a way for the government to recoup taxpayer funds spent to bail out failed firms, similar to TARP, through sales of the failed company's assets and after-the-fact assessments. The big difference, though, is that these firms are being wound down, while TARP kept them alive.
Heather C. McGhee, Washington director for Demos, a research and advocacy group, dismissed the possibility of taxpayer support. "If the goal of resolution is to unwind a company," she said, then $50 billion "should be more than sufficient."
Others advocating for reform -- including some financial experts -- disagreed with that assessment, noting that $50 billion wouldn't have been enough at the height of the financial crisis in 2008 to unwind the complex positions taken by firms like Lehman Brothers or AIG, among others.
Dodd's provision to break up large firms is similar to that found in the bill that passed the House of Representatives in December. Rep. Paul Kanjorski, a Pennsylvania Democrat and leading member of the House Financial Services Committee, authored the House provision.
"Significantly, the Dodd plan includes language quite similar to my initial proposal to permit regulators to rein in and break up 'too big to fail' financial companies, especially those that pose grave threats to our economy," Kanjorski said in a statement. "[W]e must provide regulators with the flexibility to...proactively break up those companies that have become 'too big to fail'."
Dodd's bill would also reform the way that regional Fed banks choose their presidents. In particular, the New York Fed president would be appointed by the president of the United States. He is currently appointed by banks.
Interestingly, Dodd seemed to want to minimize expectations for the proposed legislation's impact by saying several times that it is not enough to prevent another crisis: "This legislation will not stop the next crisis from coming. No legislation can..."
Click here to read through a summary of the bill:
Here is the full bill: