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The New Finance Bill: A Mountain of Legislative Paper, a Molehill of Reform

  |   July 16, 2010   12:37 PM ET

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JIM KUHNHENN   |   July 16, 2010    8:40 AM ET

WASHINGTON — In the end, it's only a beginning. The far-reaching new banking and consumer protection bill that President Barack Obama intends to sign on Wednesday now shifts from the politicians to the technocrats.

The legislation gives regulators latitude and time to come up with new rules, requires scores of studies and, in some instances, depends on international agreements falling into place.

Tim Geithner Opposes Nominating Elizabeth Warren To Lead New Consumer Agency

Shahien Nasiripour   |   July 15, 2010    6:00 PM ET

Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner's views.

The financial reform bill passed by the Senate on Thursday mandates the creation of a new federal entity charged with protecting consumers from predatory lenders.

But if Geithner has his way, the most prominent advocate for creating the agency may not be picked to lead it.

Warren, a professor at Harvard Law School whose 2007 journal article advocating the creation of such an agency inspired policymakers to enact it into law, has rocketed to prominence since the onset of the financial crisis as one of the leading reform advocates fighting on behalf of American taxpayers.

Warren has been an aggressive proponent for the bureau in public and behind the scenes, working regularly with President Barack Obama's top advisers and the Democratic leadership in Congress. Since 2008, she has overseen the Congressional Oversight Panel, a bailout watchdog created to keep tabs on how two administrations spent hundreds of billions of taxpayer dollars to bail out Wall Street while struggling to keep distressed homeowners out of foreclosure and small businesses from collapsing.

Yet while her work on behalf of a federal unit designed solely to protect borrowers from abusive lenders has been embraced by the administration, Warren's role as a bailout watchdog led to strained relations with the agency her panel has taken to task with brutal reports every month since Obama took office: Geithner's Treasury Department.

It's no secret the watchdog and the Treasury Secretary have had a tenuous relationship. Geithner's critics have enjoyed watching Warren question him during his four appearances before her panel. Her tough, probing questions on the Wall Street bailout and his role in it -- often delivered with a smile -- are featured on YouTube. One video is headlined "Elizabeth Warren Makes Timmy Geithner Squirm."

While her grilling of Geithner in September, over what members of Congress have called the "backdoor bailout" of Wall Street through AIG, inspired the "squirm" video, just last month Warren pressed Geithner on the administration's lackluster foreclosure-prevention plan, Making Home Affordable. Criticizing him for Treasury's failure to keep families in their homes, she questioned Treasury's commitment to homeowners.

Warren's persistent oversight is part of the reason for Geithner's opposition, according to the source.

In addition, her increasing public profile could make it difficult for Geithner, who will oversee the unit until it's transferred to the Federal Reserve. His role would involve trying to balance her advocacy on behalf of borrowers with the demands of the nation's major financial institutions, his traditional constituency.

Geithner's objections to Warren taking over that role also involve her views on Wall Street, sources say. The longtime professor believes the nation's megabanks are Too Big To Fail and have been among the biggest abusive lenders in the country. Her toughness on giant banks is said to be a longtime source of tension with Geithner.

Obama's top economic adviser, Lawrence Summers, is also said to have a strained relationship with Warren, though his stance on her nomination is not known.

Democrats in Congress have been among her most enthusiastic supporters. House Financial Services Chairman Barney Frank is one of many influential members who hope she'll get the nod.

And while labor and consumer groups often butted heads with Geithner on various aspects of the financial reform legislation, they have lauded his support for strong consumer protections. Warren, however, has been referred to as a "rock star" among consumer advocates. Many have told HuffPost they're hoping Obama picks her to head the new bureau.

Geithner's opposition could have political implications for a White House determined to prove it's gotten tough on Wall Street. Since March, Obama has devoted four of his weekly Saturday addresses to highlight and promote the consumer agency.

In March 2009, in response to a question during a town hall event in Southern California about the bailout for Wall Street firms and whether Obama supported tougher consumer protections on credit cards, Obama promoted Warren's academic work:

"The truth of the matter is that the banking industry has used credit cards and pushed credit cards on consumers in ways that have been very damaging," Obama said according to a transcript. "There's a woman named Elizabeth Warren who's a professor at Harvard who did a great deal of study around this. And she made a simple point. You know, if you bought a toaster, and the toaster blew up in your face, there would be a law, a consumer safety law, that would protect you from buying that toaster. But if you get a credit card that blows up in your face, that starts off at zero-percent interest, and once they kind of suck in the -- buying a bunch of stuff and suddenly it's 29 percent; and if you're late two days, suddenly, you know, you just paid another $30, and all kinds of fine print that a lot of folks didn't understand -- well, somehow that's okay.

"I think generally having some consumer safety, some consumer protection around credit cards, is important," Obama added.

Three months later, the administration released its blueprint for how it wanted to fix the nation's broken financial system. Warren's idea for a consumer agency was a heavily-promoted part of it.

Warren, a Treasury Department spokesman and a White House spokesperson all declined to comment for this article.

The Wall Street Reform Bill: How Much Did We Lose Getting to 60?

  |   July 15, 2010    1:22 PM ET

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Finance Reform: How Short Memories Are Created

  |   July 15, 2010   11:06 AM ET

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Wall Street Reform Passes

Ryan Grim   |   July 15, 2010    9:39 AM ET

Nearly two years after major banks brought the global financial system to the brink of collapse, triggering a steep economic decline and crisis-levels of unemployment, Congress passed its Wall Street reform package, 60-39, with only three Republicans joining every Democrat (but one). The president will sign it into law next week.

The bill became stronger as the nation's focus moved from health care to Wall Street reform and became tougher still as the debate was held in the open on the Senate floor and during televised conference committee negotiations. Bank lobbyists were able to beat back the most serious threats to their business model, but enough significant reforms remain to earn the opposition of the American Bankers Association and other Wall Street titans.

When Democrats last reformed the financial sector in the midst of the Great Depression, they had several advantages that today's party lacks: A Republican Party divided and willing to work with a popular president, a banking sector so devastated it had little ability to wage political combat and Senate majorities that made a GOP filibuster effectively impossible.

This time around, Congress bailed out Wall Street, protecting the largest firms from collapse, which enabled them to lobby hard against reform, spending over a million dollars a day. Wall Street has become extremely sophisticated at lobbying, relying on community banks, auto dealers and small companies who use derivatives to hedge risk as the face of their opposition.

The effort suffered from the administration's hesitation to embrace an agenda that would genuinely remake Wall Street. A provision, for instance, offered by Democratic Senators Ted Kaufman of Delaware and Sherrod Brown of Ohio would have forced the nation's megabanks to shrink. "If enacted, Brown-Kaufman would have broken up the six biggest banks in America," a senior Treasury official told New York magazine's John Heilemann. "If we'd been for it, it probably would have happened. But we weren't, so it didn't."

Despite the obstacles, some major reforms will be put in place by the bill and new authorities granted to regulators could -- depending on whether that authority is acted on -- reshape the financial industry. The bill creates a consumer financial protection entity over the strenuous objections of the GOP and Wall Street, brings serious reform to derivatives trading, gives regulators the authority to break up major banks that are deemed a threat to the system, authorizes a broad audit of the Federal Reserve, largely bars banks from trading taxpayer money for their own profit and bans many of the deceptive mortgage lending practices that fueled the housing bubble.

"It is a good step towards fixing some of the worst practices, most notably by creating the consumer protection bureau," said Dean Baker, an economist with the liberal-leaning Center for Economic Policy and Research. "However, this bill does not fundamentally change the way Wall Street does business. These guys got off incredibly easy for the enormous damage they did the country."

The Consumer Financial Protection Bureau will have an independent director and independent authority to write and enforce rules barring unfair and deceptive financial practices. The CFPB will be housed within the Federal Reserve, but the central bank has no authority to override the bureau's actions. A council of regulators, however, sits above the CFPB and can veto rules it writes, though it must do so with a two-thirds vote and by demonstrating that the rule presents a systemic risk to the financial system. Auto dealers, however, managed to buy themselves an exemption from the bureau's regulatory scope.

"A year ago, it looked like we'd get a bill written by the industry that just protected the industry from itself, and only from the exact practices that caused the financial crisis," said Rep. Brad Miller (D-N.C.), a member of the Financial Services Committee who was battling subprime lenders long before the crisis. "This bill protects us from them, not just them from themselves. There are strong consumer protections that most people never thought we'd get."

The unsung hero of the financial reform debate may be Arkansas Lt. Gov. Bill Halter, whose union-fueled primary challenge of Sen. Blanche Lincoln prodded the chairman of the Agriculture Committee to write derivatives reform legislation tougher than anything being considered at the time.

"Organized labor just flushed $10 million of their members' money down the toilet on a pointless exercise," a senior White House aide told Politico's Ben Smith the night of Halter's primary defeat. Though the swaps package was weakened in conference committee, significant pieces of it remain that will cost Wall Street billions, money that will be redirected into the real economy.

A team of Goldman Sachs analysts predicted in a Tuesday research note that the legislation will annually cost Bank of America about $4.4 billion, Citi about $3.7 billion, JPMorgan about $5.3 billion, Morgan Stanley about $900 million, and Wells Fargo about $2.2 billion. It would be hard to find a more lucrative investment that Big Labor could have made.

The bill grants broad new authorities to the Commodity Futures Trading Commission, led by Gary Gensler, the administration's fiercest champion of reform. "Few have talked about it, but the real winner here is the CFTC. Under Gary Gensler, it has perhaps become one of the most reform minded and pro-consumer regulators in Washington. Not only did it get the lion's share of authority over derivatives, but it also gained additional authority to police fraud, manipulation and abuse, to place hard limits on speculation in commodity derivatives and require foreign exchanges that do business here to register," said Jim Collura of the New England Fuel Institute, who led a coalition of derivatives users who backed reform. "The next big battle will be the rulemaking process."

Perhaps most significantly, the law will limit the total amount of derivatives speculation a single bank can engage in, aimed at preventing a run-up in food or energy prices. In 2008, Goldman Sachs and other swaps traders drove the price of wheat to levels that caused starvation around the globe. Oil prices similarly skyrocketed as a result of speculation. Lincoln's reforms will restrict the activity that led to the soaring prices and should, said Greenberger, bring down food and energy prices around the globe. "That would constrain the ability of Goldman and Morgan to lay off these commodity index bets because they will bump up against the speculation limits. That means fewer bets will be placed and that theoretically... will lead to reduction of the price of energy and food staples," said Michael Greenberger, a professor at the University of Maryland School of Law and a former Director of Trading and Markets at the CFTC. "When you add to that that [the] swaps market is going to have to be cleared and exchange-traded, it's going to be a much more transparent market. Regulators can watch it and see what its impact is on the pricing mechanisms."

Lincoln's bill also requires banks to spin off swaps operations that trade in food and energy and separately capitalize them, a reform that aims to prevent one element of a bank from bringing down the entire institution.

The bill restricts the amount of trading a bank can do with taxpayer-backed funds, a reform known as the Volcker Rule. A last-minute compromise allows banks to trade three percent of such capital, but regulators have authority to restrict such trading if it appears to be purely speculative or poses a risk to the bank.

When the Volcker Rule -- named for former Fed chairman Paul Volcker -- was first introduced, it was declared dead on arrival by Washington pundits. Bank lobbyists threw everything they had at it and managed to block it from getting a vote on the Senate floor. But the measure's backers, Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.), managed to revive it in the televised conference committee negotiations, the place where bills are normally watered down in secret.

The final bill also includes strict new rules on mortgage lending, pushed by Merkley in the Senate and Miller in the House, which banks say -- quite accurately -- will make brokering such loans less profitable. The law puts an end to "liar loans" that require no documentation of ability to repay the loan. It bans so-called "steering payments," handed to brokers who persuaded borrowers to take out more expensive loans than the ones they qualified for. And it prevents banks from charging draconian repayment penalties, provisions that were written into loans to lock a consumer into debt.

"I've fought an uphill battle against predatory mortgage lending the whole time I've been in Congress, and the bill includes almost everything I've fought for. I'm not going to let anybody lick the red off my candy because the bill could have been stronger," said Miller.

There are also lower-profile reforms that could have dramatic consequences in the future, such as the provision to authorize a broad audit of the Federal Reserve and mandate unprecedented disclosure of Fed lending. Another little-discussed provision requires American companies to disclose payments they make to foreign governments in exchange for access to resources. "This proposal is a great lever to support more transparency and healthier governance in poor countries," said Bono, co-founder of the anti-poverty group ONE, in a statement. "It will empower activists, media and good-governance watchdogs, both south of the equator and north, to ensure the continent's vast riches end up in service of its people, not lining the pocket of some kleptocrat."

The fight is far from over. The bill relies on financial regulators to study nearly 70 proposals and issue at least 200 new rules, according the Financial Services Roundtable, a lobby group for large financial firms, and a July 9 memo by Davis Polk & Wardwell LLP, one of the nation's biggest law firms. Davis Polk only counted those rules explicitly mandated for adoption in the bill, meaning the 200-plus number is likely a significant underestimate. How those rules are written, who writes them and how they're enforced will dictate the success or failure of the reform enterprise.

Perhaps the biggest disappointment for reformers is that the bill leaves in place the major banks that caused the crisis. The largest banks have grown larger under Obama's watch. Banks will still be able to speculate in the riskiest kinds of derivatives and invest in hedge funds and private equity funds. Depending on what regulators decide, they may not be required to hold much more capital to protect against losses than before the crisis, since neither a number nor a formula was specified in the bill. They may still continue to lever up their investments, imitating a practice of the fraud-inflated housing boom in which some investment firms used $1 to back up every $30 in investments and bets.

Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley -- the nation's six biggest bank holding companies by assets -- collectively hold more than $9.4 trillion in assets, according to their most recent quarterly filings with the Federal Reserve, a figure equivalent to two-thirds of the nation's total economic output last year, according to International Monetary Fund figures. It's also greater than the 2009 output of every other nation in the world.

An amendment championed by Rep. Paul Kanjorski (D-Pa.), however, gives federal regulators the power to break up big banks if they pose a "grave risk" to the financial system.

"The Federal Reserve is in the hot seat on this issue -- and it needs 7 out of the 10 members of the new systemic risk council to agree to any action. But for the first time someone at the federal level must make a determination regarding whether an individual firm poses system risk," says Simon Johnson, an economist who writes for HuffPost and the New York Times.

If regulators don't act on the authority granted them by the Kanjorski amendment, major banks will continue to represent a threat to the system. The heads of at least six regional Federal Reserve banks have criticized the bill for failing to enact what Obama's top economic adviser, Lawrence Summers, has said is the administration's "central objective" in reforming the financial system -- ending the perception that some financial firms are "Too Big To Fail".

Regional Fed chiefs from Dallas, St. Louis, Kansas City, Philadelphia, Richmond, and Minneapolis have all either doubted the bill's ability to end TBTF, criticized it for its perceived ineffectiveness, or simply said that bailouts are inevitable when it comes to such banks.

Though the banks survived this round, said Greenberger, they may not survive the next. We are not out of the woods yet as to the recession," he said. "I believe there will be a double-dip [recession] and I think when there is a double dip there will be more outcry over the conduct that led to this problem. The double dip will likely go right back to looking at what caused the problems to begin with, and to the extent that there are shortcomings in the legislation, I think it can be fixed when Congress takes another look and if the American people are agitated by further disastrous implications for the American economy."

UPDATE: The cloture vote's roll call can be found here. Sen. Russ Feingold (D-Wisc.) voted no.

Jack Lew: Obama's OMB Pick Oversaw Citigroup Unit That Shorted Housing Market

Shahien Nasiripour   |   July 14, 2010   10:00 AM ET

President Barack Obama's choice to lead the White House budget office oversaw a Citigroup unit that profited off the housing collapse and financial crisis by investing in a hedge fund king who correctly predicted the eventual subprime meltdown and now finds himself involved in the center of the U.S. government's fraud case against Goldman Sachs.

Jacob Lew, named Tuesday as Obama's nominee to lead the Office of Management and Budget to replace departing OMB chief Peter Orszag, served as chief operating officer of Citigroup Alternative Investments in 2008. He has served as a top aide to Secretary of State Hillary Clinton since the administration came into office.

Though Lew is a longtime public servant who's spent nearly 30 years in various positions throughout government, it is his few years at Citi -- in particular the one year he spent at its then-$54 billion proprietary trading, hedge fund and private equity unit -- that's likely to raise the most eyebrows in the coming weeks as Lew faces a Senate confirmation hearing.

Especially his unit's investments in a hedge fund that bet on the housing market to collapse -- a reality suffered by millions of American homeowners.

At the time, Citi's Alternative Investments unit was a $54.3 billion behemoth that participated in the kinds of activities that would be largely limited under the coming financial reform bill. The bill, which is expected to pass the Senate as soon as this week, contains the "Volcker Rules," named after their champion, former Federal Reserve Chairman Paul Volcker, which limits the amount of money banks can invest in hedge funds, private equity funds, and use to either invest or speculate in the financial markets. About 20 percent of the unit's available funds, or $11 billion, came from Citi itself (rather than clients), according to the bank's April 18, 2008, presentation to investors.

One part of the entity invested in hedge funds. Multi-Adviser Hedge Fund Portfolios LLC was a unit of Alternative Investments' Hedge Fund Management Group, the 36th-largest such "fund of hedge funds" in the world when Lew came aboard, according to a ranking by Alpha magazine, a publication that covers the hedge fund industry.

That Multi-Adviser fund in particular had $407 million by the end of 2007, a week before Lew was named as Alternative Investments' chief operating officer, according to SEC filings. At that time, it had $18 million invested in Paulson Advantage Plus LP, worth $26.4 million, comprising about 6.5 percent of the Multi-Adviser fund's total capital.

The Paulson fund was run by hedge fund king John Paulson, the man who made billions off the deterioration of the housing industry by making bearish bets on securities tied to home mortgages -- particularly subprime home mortgages.

One of those bets involved Goldman Sachs, Wall Street's most profitable firm and the target of multiple investigations and lawsuits stemming from its bets on the housing market and actions during the height of the financial crisis.

On April 16, the SEC charged Goldman and one of its employees for defrauding investors by creating and selling exotic securities tied to subprime home mortgages in 2007 without disclosing that they were handpicked by a hedge fund that was betting on them to fail.

That hedge fund was run by John Paulson. He has not been charged with any wrongdoing, nor is he likely to be.

During Lew's tenure atop Citi's Alternative Investments group, the Multi-Adviser fund significantly increased its investment in Paulson's fund, more than doubling Citi's investment to $41.5 million by March 2008. On paper the firm's investment was worth $55.2 million, accounting for 9.7 percent of the fund's total assets to rank as its second-biggest investment, SEC filings show.

The next quarter, the value of the investment jumped to $60.3 million, making it the biggest part of the Multi-Adviser fund.

By the end of September, the Citi fund, realizing some of its profits, took money out of Paulson's hedge fund. It's investment was down to $31.5 million, a $10 million decrease from June, but it was still worth $57.3 million, a mere $3 million less than June's appraisal, according to filings with the SEC.

By December 31, the value of Citi's investment jumped to $57.3 million, reflecting the declining fortunes of homeowners and other investors, and the economy at large. It now comprised 10 percent of the Multi-Adviser fund, making it the fund's biggest holding.

The Citi fund redeemed $13 million of its stake in Paulson's hedge fund by March 2009, bringing its investment down to $18.5 million -- roughly the same amount it was before Lew became Alternative Investments' COO. But that stake -- worth $26 million at the end of 2007 -- was now worth more than $50 million, SEC filings show.

Paulson's fund, Advantage Plus LP, went up 37.8 percent in 2008, according to Paulson's year-end letter to shareholders.

The Advantage Plus fund made its money thanks to bearish bets on financial institutions.

"[E]ight out of the top 10 banks on our list either failed, were recapitalized by the government, or were sold off to other banks as part of government-backed transactions," the hedge fund wrote to investors in its year-end letter.

Investors who bet on declines perform a productive role in financial markets. Such investments send signals to the markets that certain securities or valuations of certain companies or asset classes may be overvalued, perhaps tempering what may be too much enthusiasm that prices will continue to rise.

But in an age in which the housing collapse led to a financial upheaval that cost 8 million American jobs and plunged the nation into its deepest recession since the Great Depression, bets that profited off the collapse may not be perceived in the best light.

In Florida, Democratic Congressman and Senate hopeful Kendrick Meek is hammering his Democratic opponent, billionaire Jeff Greene, for his investments in securities tied to subprime mortgages, accusing him of profiting "off the backs of Floridians" who defaulted on their home mortgage loans. Greene reportedly doubled his net worth by betting against homeowners.

Citi paid Lew $1.1 million for his year at Alternative Investments, according to an ethics disclosure report filed in January 2009. He was also eligible for an undisclosed bonus. Lew did not immediately return a call for comment.

His unit, though, lost as much as billions of dollars in 2008 as its bets turned sour. In the first quarter of 2008 alone the unit lost $509 million; the company stopped publicly disclosing the unit's individual numbers soon thereafter, but the part of the company that absorbed Alternative Investments lost $20.1 billion in 2008, according to the bank's filings with the Securities and Exchange Commission.

Citigroup, the nation's third-largest bank, received $45 billion in TARP bailout funds that year. The firm also has issued $64.6 billion in taxpayer-backed debt through a crisis-era Federal Deposit Insurance Corporation program, according to its latest quarterly filing with the SEC. And it stands to gain a few billion dollars more by modifying home mortgages under the administration's foreclosure-prevention plan, Treasury Department figures show.

Lew's role at the fund is raising some eyebrows among good government groups.

"That sounds pretty nasty, doesn't it?" said Gary Bass, executive director of OMB Watch, a group that monitors the budget office. "Any activity and any player that contributed to the economic calamity needs to be looked at.

"We already got enough players in this administration that certainly were key players in the economic malaise that we currently have," Bass continued. "Why shouldn't we have another one?" he said with a slight chuckle.

But Bass added that he thought Lew was an otherwise excellent choice for the position, noting that as budget director Lew has a proven track record (he held the position during part of the Clinton administration).

During a January confirmation hearing before a Senate panel for his State Department post, Lew told senators that the investments his unit engaged in "ranged from private equity investments to real estate investments and various forms of fixed-income investments."

In December 2007, Citigroup Alternative Investments ended up supporting some of the bank's off-balance-sheet vehicles that tanked that year along with the subprime mortgage market. Known as structured investment vehicles, Citigroup effectively brought the SIVs onto its balance sheet by backing them up, leading to tens of billions in losses.

While putting him atop Treasury may have been a risky move considering his background, Bass said OMB would be a good fit -- particularly if he calls for more stimulus spending to combat the softening economy as opposed to insisting on deficit reduction.

Bass added that, given Lew's position overseeing a unit that invested in hedge funds, he'd like to know whether Lew believes that hedge fund managers should be taxed like other workers, as opposed to the relatively paltry share of income they give to Uncle Sam thanks to rules governing taxable income earned by private-equity and venture-capital firms, and hedge funds. Their compensation, part of which is earned on "carried interest," isn't taxed like regular wages because of their role in creating new investments.

The White House did not return a phone call and an e-mail seeking comment.

However, during his regular briefing with White House reporters on Tuesday, Obama's chief spokesman, Robert Gibbs, was questioned about Lew's tenure at Citigroup. Gibbs dismissed the queries, according to a transcript.

"Obviously, Jack has been through a vetting process before," Gibbs told a reporter who had asked whether Obama ever questioned Lew about his work at Citigroup. Gibbs eventually said he didn't know.

Asked if Lew's time at Citigroup was "relevant" and whether it would be "relevant" during his next confirmation hearing, Gibbs said that "those questions have been dealt with."

During that January 2009 confirmation hearing, Senator Johnny Isakson, a Georgia Republican, asked Lew if it was correct that he was COO of Citi's Alternative Investments unit (it was); what kind of investments the unit engaged in ("they ranged from private equity investments to real estate investments and various forms of fixed-income investments"); and whether those investments involved "much of international security trading" ("Lew said "not directly" and those that had an international focus "were really managed offshore"), according to a transcript.

There were no other questions about Lew's time at Citigroup.

*************************

Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news.

JIM KUHNHENN and ANN SANNER   |   July 14, 2010    8:47 AM ET

WASHINGTON — Cast this debate as big banks versus big government.

Despite lingering public anger at Wall Street, most congressional Republicans oppose the tougher financial regulations that Congress is expected to send to President Barack Obama this week.

DANIEL WAGNER   |   July 14, 2010    8:31 AM ET

WASHINGTON — To the list of economic woes squeezing small banks, add another one: government bailouts.

The Treasury Department's bailout program was designed with Wall Street megabanks in mind, according to a new report from a congressional watchdog. The "one-size-fits-all" program may actually be hurting small banks that are struggling to repay the money or even deliver quarterly dividend payments, the report says.

Reid Bringing Wall Street Reform To Senate Floor

Ryan Grim   |   July 13, 2010   10:14 AM ET

Sen. Harry Reid (D-Nev.) will file cloture on the Wall Street reform report on Tuesday, paving the way for a final vote later this week. On the Senate floor Tuesday morning, Reid said he "expect[s] to consider the Wall Street reform conference report sometime later today."

Reid spokesman Jim Manley said that the majority leader intends to file cloture, not bring the bill to a floor vote, which would require the consent of all senators.

On Monday, Sen. Scott Brown (R-Mass.) announced he'd support the bill, apparently giving Democrats the 60 votes they'd need, along with a replacement for the late Robert Byrd, expected later this week or early next. Sen. Ben Nelson (D-Neb.) threw a wrench in the works hours later, telling reporters he was undecided on the bill. Sen. Olympia Snowe (R-Maine) pulled the wrench back out of the works roughly an hour later, putting out a statement in support.

Given Snowe's support, Democrats have several ways to get to 60: Either Byrd's replacement arrives; Nelson announces support, a near certainty; Sen. Susan Collins (R-Maine) backs the bill, or Sen. Charles Grassley (R-Iowa) comes out for it. Collins, Nelson and Grassley all supported the final passage in the Senate. The final conference report, said Nelson, only includes "slight modifications," which he is studying nonetheless.

UPDATE: An aide to Nelson tells HuffPost that the Nebraska senator will vote yes, giving Democrats the 60 needed to break a filibuster. A vote can't come until Thursday, given Senate cloture rules, but, effectively, it's over.

Elizabeth Warren To Head Consumer Protection Bureau?

Ryan Grim   |   July 12, 2010    4:39 PM ET

Once President Obama signs Wall Street reform into law, the battle will move off the front pages, but it'll be far from over. Who the president picks to lead key agencies and commissions will determine the course and strength of those regulatory bodies, much as Joe Kennedy shaped a half century of tough financial industry regulations by setting the tone as the first head of the Securities and Exchange Commission.

Two positions are being watched closely by both sides: A new head of the Office of the Comptroller of the Currency (OCC) and the first head of the Consumer Financial Protection Bureau (CFPB).

Regardless of the regulator Obama picks to run OCC, banks will be losing one of their best friends. John Dugan consistently fought to protect banks from regulation, compiling a record of fealty to Wall Street impressive even by Bush-era standards. His term expires in August.

At the CFPB, Wall Street and the GOP have been working to prevent Elizabeth Warren from assuming the helm long before the body had been created. An amendment pushed by House Republicans in the Financial Services Committee was intended specifically to eliminate the possibility of her leading the agency.

It failed and Warren, a Harvard professor and the intellectual mother of the bureau, has the strong backing of committee chairman Barney Frank (D-Mass.), as well as Rep. Brad Miller (D-N.C.), who led the push in the House for tighter consumer protections in the mortgage lending industry. Many consumer advocates would view any appointment other than Warren as a disappointment.

"We wouldn't have had a financial crisis if the supposed watchdogs hadn't been ventriloquists' dummies for the banks. The CFPB is a huge win for consumers, but it will have been a waste of time if the CFPB is just one more agency controlled by the banks," Miller told HuffPost. "We need someone to head the CFPB who is smart, tough and independent-minded. Professor Warren fits the bill."

In its write-up of possible CFPB heads, the trade paper American Banker mentioned Warren first, followed by Michael Barr and Eric Stein, both senior Treasury officials, as well as Fed official Allen Fishbein, who focuses on consumer issues, and Ellen Seidman, a former regulator at the Office of Thrift Supervision and now a banker.

Barr was a lead Treasury negotiator during the crafting of Wall Street reform deliberations. His policy portfolio, where he focuses on financial institutions, makes him an apparently more suitable pick for the OCC than the CFPB.

Wall Street wouldn't be happy if he wound up at either body. Though he is viewed with some suspicion in progressive circles for having served as a special assistant to former Treasury Secretary Robert Rubin, Barr has reportedly earned the enmity of the Wall Street lobbyists, who say he refuses to take their phone calls. His economic research has focused on the relationship between Wall Street and low- and middle-income Americans. In 2009, he co-edited the book "Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Families."

If Obama chooses someone other than Barr to lead OCC, that makes Barr a leading candidate for CFPB, damaging Warren's chances. A Treasury spokesman declined to comment on the speculation, as did Warren.

In the Wall Street Journal's speculation about CFPB leadership, Warren is again mentioned first, followed -- again -- by Barr.

The WSJ also suggests as potential candidates Martha Coakley, the Massachusetts attorney general who theatrically lost her bid for the U.S. Senate in January. Lisa Madigan, the Illinois attorney general, and Lori Swanson, Minnesota's top cop, are mentioned, as are Susan Wachter and Nicolas Retsinas, academics with government backgrounds.

Coakley, however, thinks Warren would be the right pick. "I think, frankly, that Elizabeth Warren would be a terrific head of that agency," she said on Fox Business when asked if she herself would be interested in the gig. "She's thought a lot about the consumer protection piece."

Madigan, too, declined to be considered and threw her weight behind Warren. "Not only was it [Warren's] idea to create the Consumer Financial Protection Bureau, but she has long understood the need for such an agency to ensure that another financial crisis doesn't devastate the futures of millions of hardworking Americans," Madigan said in a statement.

Warren has distinguished herself over the past year and a half as the head of the Congressional Oversight Panel, the bailout watchdog, which earned her bipartisan praise.

Financial Reform: Now It's Up to the Regulators

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Alan Grayson To The Fed: 'We'll Be Back'

Ryan Grim   |   July 9, 2010    3:23 PM ET

The Wall Street reform package currently awaiting the return of Congress from the Fourth of July recess is packed with provisions that will remake the financial landscape. One element, though, which has gotten relatively little attention in the media, is a wild card: the authorization of a far-reaching audit of the Federal Reserve for the first time in the central bank's history.

The audit measure is retroactive -- it requires unprecedented disclosure of the identity of businesses, banks, hedge funds, foreign central banks or any other entity that was on the receiving end of Fed largess, and will reveal how much they got and on what terms. The information is required to be posted online within 30 days of the law's enactment.

Depending on what the audit turns up, the Fed could find itself back in the public eye and could face growing calls for reform. "I think once people see what the first audit discloses, they're going to want to see more," said Rep. Alan Grayson (D-Fla.), who, along with Rep. Ron Paul (R-Texas), shepherded the audit bill through the House. "We'll be back."

Paul first got involved in the effort to audit the Fed in the 1970s, he said, signing on to bills by Texas Democrat Henry Gonzalez, whose chief investigator has since written the definitive book on Fed opacity.

"It was one of the motivating factors for me to be involved in politics," Paul said of Fed secrecy. Grayson, meanwhile, was in his first term. "I did know when we started this that this was a bill that had been introduced over and over again for 26 years," said Grayson.

Popular interest in the Fed, which flowed from Paul's insurgent GOP presidential primary bid and was stirred by the central bank's expansive role staving off a financial-system collapse, which flooding banks with billions of dollars. Grayson's committee interrogations of Fed officials, from Chairman Ben Bernanke on down, have garnered millions of views online.

"It wasn't me lobbying that got all those signatures," said Paul. "It was the issue, how well it was popularized. I think certain Web pages were of tremendous help, both coming from the left and the right and the middle."

The key moment, said Grayson, came in the Financial Services Committee, when he and Paul were able to fend off a Fed-backed alternative in November from Democrat Mel Watt (D-N.C.) that was exposed as reducing Fed transparency rather than expanding it. Watt's camp sent around a letter backing his amendment signed by what they called a "political cross-section of prominent economists."

Seven of those eight economists, however, turned out to be affiliated with the Federal Reserve.

"We got the vote in committee, which was the crucial decision point," Grayson said. "The vote in committee was only possible because so many people had decided beforehand that they supported an audit."

Grayson had been lobbying his colleagues hard, passing around articles laying out the differences between the amendments and a letter of support from unions, liberal bloggers and conservative activists.

When the final committee vote came, Paul thought they'd been defeated because the top two rows of Democrats - the most senior members - were casting no votes. "The first one and a half [rows], we had no supporters," Paul told HuffPost. "I though, 'Oh, we're not getting any Democrats here.' But then when we got to the new Democrats, that's when we picked up our supporters."

Paul credits Grayson for whipping up support in the House. "I think he probably did more one-on-one than I did," he said. "I didn't do a whole lot more than I've done in the past, because most of the things I do are very philosophic and symbolic. But this one I probably did a little more asking, but I would say that not too many [members of Congress] came up to me on the floor and said, 'Sign me up'--a few did--but most of them it was they heard from their constituents and they called over and they got their name put on."

Once the debate moved to the Senate, the Fed and Treasury -- led by Tim Geithner, who was head of the New York Fed during the time the audit will review -- had the upper hand, said Grayson, because little work had been done to lay the ground. It didn't help that one of the lead sponsors was Sen. David Vitter, a Louisiana Republican who is intensely disliked by Democrats and has few friends on the GOP side. Sen. Bernie Sanders (I-Vt.) took the lead from the other side and eventually worked out a compromise with Sen. Chris Dodd (D-Conn.), who opposed an expanded audit. A vote that had been in question in the morning turned into a 99-0 route by the afternoon, as both the left and right backed Sanders' measure, leaving the center no cover to oppose it.

Assuring that Sanders' compromise got into the Senate bill meant that Fed audit backers would at least get something in conference, if not everything they'd gotten in the House.

The compromise only allowed one audit, but introduced the disclosure requirement. In conference, the House was able to beat back efforts to kill it and expand the provision to allow for ongoing disclosure. "We adopted the Senate's thinking about a need for a continuing disclosure requirement. And that was a constructive and, I think, potentially very productive element to what we've done," said Grayson.

Despite the compromise, Paul said he's supportive of the final measure. "The supporters who really, really want the whole thing all at once, a lot of them will probably be disappointed," he said. "I think PR-wise we get an 'A' for actually getting real exposure." On the specifics of the provision, he said: "We probably get a C-minus, because even with some of those provisions in there, where they're going to have to turn over some information, that doesn't mean it's going to be automatic... But they've agreed, and at least it's on the books, that they're supposed to tell us where they sent the money."

Grayson and Paul are worried about one loophole in the Senate's language that the House voted to fix, but the Senate rebuffed. The final language provides for disclosure of information about a lending program after the facility has been closed. The Fed argues that the facilities are temporary, so there will be no extreme delay, but Grayson wonders if they'll keep facilities open just to keep from disclosing information. Fed officials have insisted to Grayson they will not -- and note that many have already closed. "If there is any indication that the Fed is actually doing that, you will very quickly see legislation to prevent them from taking advantage of that loophole," Grayson said.