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Frank Battling White House On Proxy Access

Ryan Grim   |   June 17, 2010   12:36 PM ET

UPDATE, 6/24/10: Barney Frank and his House colleagues are standing strong against a White House effort to block shareholders from having proxy access to governance issues in corporations in which they have a stake. Investors, pension funds and labor unions reacted with alarm when Sen. Chris Dodd (D-Conn.) introduced the Senate proposal that would effectively deny so-called "proxy access." The provision had not been approved by either the Senate or the House and several sources, both in Congress and in the industry, said the White House is pushing the measure. The White House proposal would require a shareholder to hold a five percent stake in order to have proxy access -- a level met by virtually no institutional investors.

Frank vowed at the time to fight it and today he did. After rejecting the Senate proposal earlier this week, Frank made the House counter-offer Thursday, suggesting that the authority to write rules remain with the Securities and Exchange Commission, which is currently drafting language to allow proxy access.

It shouldn't be difficult for Dodd to accept the counter-offer. Indeed, in 2007, Dodd wrote to the SEC arguing against the very proposal that he recently offered. "The proposed rule requires that a proposal be submitted by a shareholder or group that owns more than five percent of a registrant's stock in order to be included in the proxy, which would effectively bar most shareholders from ever filing such proposals. Since an institution has a duty to diversify its portfolio, the level of it[s] holdings in any one company would be small and insufficient to meet this threshold. This threshold should be eliminated," wrote Dodd, joined by other senators, including Sen. Tim Johnson (D-S.D.), who joined Dodd in backing the opposite of what he'd previously proposed. Read the letter here.

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June 17, 2010 - The White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform.

A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC's authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday. Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources -- congressional aides as well as outside advocates -- requested anonymity for fear of White House reprisal.

The White House move pits the administration against House Speaker Nancy Pelosi (D-Calif.), who told Barney Frank (D-Mass.) to stand strong against the effort.

"I met with the Speaker today and she said, 'Don't back down. I'll back you up,'" Frank, the lead House conferee, told HuffPost. "Maxine Waters is very upset, as are CalPERS and others."

Advocates said that the corporations fought the issue primarily over executive compensation concerns. Given proxy access, investors could rein in executive salaries. The Business Roundtable is a lobby of corporate CEOs.

Valerie Jarrett, a senior White House adviser and Obama confidante, is the administration liaison to the Business Roundtable.

An administration spokesperson said that the White House isn't flip-flopping because it has never made proxy access an explicit position it supports. "It was not part of our original financial reform proposals, and we have not taken a position explicitly. We have heard from and understand the various concerns on this critical corporate governance issue from multiple stakeholders including business, investors, labor and others. We are confident that the House and Senate conferees will come to a resolution and deliver a consensus view," said the spokesperson.

But two top administration officials publicly supported proxy access, and the Senate version in particular, at the Council of Institutional Investors annual conference in April. Deputy Secretary of the Treasury Neal Wolin addressed the provision. "The Senate bill will make clear that the SEC has unambiguous authority to issue rules permitting shareholder access to the proxy. We support that proposal. The SEC's rulemaking process will define the precise parameters of proxy access," he said. "But the principle is clear: long-term shareholders meeting reasonable ownership thresholds should have the ability to hold board members accountable by proposing alternatives and making their voices heard."

Valerie Jarrett followed Wolin. "The Senate bill will make it clear that the SEC has unambiguous authority to issue rules permitting shareholders access to the proxy -- essential, as I know you guys know," she said. "We agree that corporate governance means more transparency, more responsibility, more accountability, and once again -- I can't say it too often -- we stand firmly with you on that point."

The statements were heartening to the investors, who were blindsided by the reversal this week.

The investor-protection language was stripped and replaced by an amendment from Sen. Chris Dodd (D-Conn.), who leads the upper chamber's negotiations in the conference committee. Dodd is retiring at the end of this Congress.

Dodd's amendment to the Senate language inserts a requirement that only an individual with a five percent stake in a corporation can nominate candidates to the board or otherwise participate in corporate governance. Even the largest pension funds don't come anywhere close to owning five percent of a major corporation. The biggest pension funds are more likely to hit the half-percent threshold in rare cases.

"I guess this is the way it works, but the sucker was like a bolt from the heavens. It came out of nowhere," said one advocate working on the issue.

Frank said that he wasn't certain the White House was involved. "There may be some sense that the White House -- I'll explain it this way: this affects, of course, not just the financial institutions, but all corporations and, yeah, I think there are some people in the White House who think, 'Well, we're fighting the financial institutions, but why fight with some of the others you know, the other corporations?' But all I can do is stand firm in our position, which we're doing. I think there may be some White House influence, but I don't really know. I would ask the Senate. It is interesting that they are reversing their own position," he said.

Backers of the underlying House and Senate language said that, as of last week, there was no indication that the provision would be stripped.

Because the conference committee deliberations are televised, a broad range of interested observers were able to watch corporate America gut the reform proposal live. On Thursday, Sen. Chuck Schumer (D-N.Y.) fought back, attempting to amend the language to strike the five percent requirement. It failed; the only Democrats to back Schumer in the vote were Pat Leahy (D-Vt.), Tom Harkin (D-Iowa) and Jack Reed (D-R.I.).

The SEC is planning to issue rules related to proxy access. Those rules would be made meaningless by the language currently being pushed.

"We're just horrified that the Senate would try to weaken language that was similar in both bills. To set such a high threshold makes the reform totally unworkable," said Ann Yerger of the Council of Institutional Investors.

"It is very, very costly for investors to mount a proxy contest and to solicit votes against directors. Proxy access changes that by giving investors -- the owners of the business -- the same access to the proxy as management has for purposes of nominating a director," said
Lynn E. Turner, the Securities and Exchange Commission's chief accountant from 1998 to 2001. "It is extremely important [that] to avoid systemic risk investors be able to hold boards accountable. Otherwise, board members see no upside, only downside, to ever opposing management or putting the tough questions to them."

LISTEN to Jarrett at the CII conference:


This story has been updated to include the White House response. Lucia Graves contributed reporting

Bernanke: Financial Reform Could Limit Megabank Growth, But Won't End Too Big To Fail

Shahien Nasiripour   |   June 16, 2010    8:30 PM ET

Federal Reserve Chairman Ben Bernanke said Wednesday that the pending financial reform legislation before Congress could have the effect of simplifying the nation's largest banks and limiting their ability to grow even larger, adding that while the bills could help end Too Big To Fail, key challenges remain.

He did not, however, say that the legislation could or should force the nation's financial behemoths to shrink -- a point advocated by his colleagues in regional Federal Reserve banks across the country.

Stressing the Fed's ongoing improvements in how it regulates banks and supervises the financial system, Bernanke told a crowd of bankers, regulators and economists in New York that the Fed's efforts and the bills pending in Congress will go a long way toward addressing the problems associated with Too Big To Fail and the weaknesses in the current financial regulatory system.

The Fed, Bernanke said, is attempting to "construct better measures of counterparty credit risk and interconnectedness among systemically critical firms"; "improve their understanding of banks' largest exposures to other banks, nonbank financial institutions, and corporate borrowers"; its supervisors are "collecting data on banks' trading and securitization exposures, as well as their liquidity risks"; and the Fed is paying attention "not only to the risks to individual firms, but also to potential systemic risks arising from firms' common exposures or sensitivity to common shocks."

These are among the recommendations advocated by the Squam Lake Group, a collection of 15 top economists from across the country advocating specific financial reforms to address the weaknesses that led to the worst financial crisis and subsequent economic downturn since the Great Depression. SLG organized the meeting.

Attendees included Frederic Mishkin, a former Fed governor; current Philadelphia Fed chief Charles Plosser; Henry Hu, a top official at the Securities and Exchange Commission; Raymond W. McDaniel, Jr., chairman and CEO of Moody's Corporation, parent of Moody's Investors Service; Peter Fisher, a former top Treasury Department official; Paul McCulley, managing director of Pimco, the world's largest bond investor, and the man who coined the phrase "shadow banking system"; Jan Hatzius, chief U.S. economist for Goldman Sachs; Lorenzo Bini Smaghi, an executive board member of the European Central Bank; top officials from the International Monetary Fund and the Organization for Economic Cooperation and Development; and bankers from the world's largest financial firms.

In explaining how the Fed's actions will impact many of those in attendance, Bernanke said their firms may not be allowed to get any bigger.

"Enhanced prudential standards for the largest firms should also reduce the incentive of firms to grow or otherwise expand their systemic footprint in order to become perceived as too big to fail," he said.

Thomas Hoenig, Richard Fisher and James Bullard, regional Fed presidents from Kansas City, Dallas and St. Louis, respectively, have said the nation's megabanks should instead shrink because they're already too big.

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

Bernanke added that the largest banks could also be forced to simplify their businesses, a key reform advocated by those wishing to ensure no individual firm's failure could put the entire financial system at risk, something that occurred at the height of the financial crisis in 2008.

"[T]he financial reform legislation under consideration in the Congress usefully requires each systemically important financial firm to prepare a 'living will' that sets out a plan for winding down the firm's operations in an orderly manner," the central banker said. "The creation and supervisory review of these plans would require firms and their regulators to confront the difficulties posed by complex legal structures well in advance of the firm's financial distress, and in some cases could lead firms to simplify their internal structures."

As for Too Big To Fail, Bernanke generally praised the approach taken by Congress. The Senate and House financial reform bills both call for enhanced "resolution authority" that should give policymakers a way to dismantle systemically important firms on the verge of failure.

Bernanke said the proposed authority "is necessary if commitments to allow failure are to be credible, which in turn is essential to reverse the perception that some firms are too big to fail."

But, he added, "a key challenge would be fostering the international cooperation needed to manage the cross-border aspects of such a resolution regime."

Many critics of the legislation point to the international issue as one that assures that the resolution authority will never work -- megabanks and other systemically important firms have such extensive operations in foreign markets that there's no way to effectively dismantle them in one country without causing panic in others.

Regulators in the U.S. are trying to coordinate just such an international regime to ensure that firms with broad international scope can be wound down safely if need be. The credibility of the proposed resolution authority depends on it, experts say.

"It's going to take some experience, practice and time for all of us market participants, regulators and others to assess whether or not [the proposed legislation] fully meets the concerns that led to the legislation in the first place," Bernanke said.

Charles Plosser, Philadelphia Fed Chief, Criticizes Financial Reform Bills, Says They Don't End 'Too Big To Fail'

Shahien Nasiripour   |   June 16, 2010    4:00 PM ET

A top Federal Reserve official reiterated his call Wednesday for a tougher approach to ending Too Big To Fail, arguing that the current pending legislation before Congress doesn't adequately address the "most important element in fixing our financial system."

Federal Reserve Bank of Philadelphia President Charles Plosser criticized proposals that leave too much discretion to regulators and political appointees -- as the legislation does -- because he feels that when the time comes for a failing TBTF bank to be dismantled and shut down, regulators will be reluctant to pull the trigger.

"I don't think we've got the Too-Big-To-Fail problem solved in this legislation, and that's the one I worry most about," the central bank official told a crowd of bankers, regulators and economists in New York. Organized by a group of 15 economists that comprise the Squam Lake Group, the meeting was held to discuss the group's views on reforming the financial system.

"In my view, the most important element in fixing our financial system is that we must end the notion that some financial firms are too big or too interconnected to fail," Plosser said. "If a firm's creditors believe that the government will rescue them in times of trouble, they will have little incentive to exert market discipline and discourage a firm from taking excessive risk.

"Eliminating too big to fail should be the first priority of any regulatory reform. This is easier said than done. As the crisis has taught us, when the systemic risks are perceived to be large -- and regulators are prone to see systemic risks under every rock -- they will be very reluctant to close down insolvent firms or impose losses on creditors.

"So how do we reduce these risks so that regulators can credibly commit to a policy of allowing financial companies to fail and not resort to rescues or bailouts?" he asked.

Plosser is one of at least four regional Fed presidents who have publicly said that the current pending legislation does not do enough to end Too Big To Fail. Richard Fisher of Dallas, Thomas Hoenig of Kansas City and James Bullard of St. Louis are the known dissenters.

The Obama administration and the Fed's Washington-based Board of Governors, meanwhile, publicly cheer the legislation, hailing it as the measure that will end TBTF.

"While Congress is likely to pass a regulatory reform bill in the coming weeks, this is certainly not the end of the process of regulatory reform," Plosser cautioned. "Regulators will need to work out many details left open by the legislation.

"And taking the longer view, I don't think that Congress's approach is necessarily the final word on designing a resolution mechanism that will end the problem of firms that are too big to fail."

Instead of relying on the approach advocated by the Obama administration, which was largely adopted by both the House and Senate, Plosser repeated his call for a new bankruptcy-like process to resolve large, complex financial firms on the verge of failure. Market participants need firm rules and procedures, he argued, echoing a view voiced by Hoenig. Relying on regulators won't be enough.

"[I]f we are to deal effectively with the too-big-to-fail problem, we must have a credible mechanism to deal with such failures," Plosser said. "[T]he resolution process should be as predictable as possible; regulatory authorities should not be able to use discretion to alter contractual claims in the resolution process.

"I believe a bankruptcy court with special procedures for financial institutions would be better equipped than a bank regulator to credibly dismantle large financial institutions without bailouts," he added.

And unlike current bankruptcy law, which exempts derivatives contracts from its normal procedures, Plosser thinks this new version of bankruptcy should include most derivative contracts.

"Arguably, this special treatment actually increased systemic risks during the recent crisis," Plosser said of the existing exemption of derivatives contracts from bankruptcy court.

Here's how:

"Sophisticated counterparties were encouraged to provide short-term repo funding, collateralized by securities that turned out to be very illiquid, such as various asset-backed securities," he said. Repos are repurchase agreements, which are transactions in which one party borrows cash using securities as collateral with a promise to buy back those securities at a later date.

"These creditors clearly perceived that they did not need to carefully monitor their borrowers' condition, in part, because they expected that they could seize collateral before other claimants," he said. "In turn, this created incentives for the borrowing firms to increase leverage, and increase their reliance on short-term funding, which increased fragility in the financial system."

Hence, he argues, "we should limit the special treatment in bankruptcy to a much smaller group of contracts, such as those repos secured by highly liquid collateral (cash or Treasuries)."

If that happens, then other types of short-term funding may become "more expensive and less pervasive," Plosser said. "In turn, our financial system might become a little less fragile. Not such a bad outcome."

As for the oft-repeated critique that the international coordination issues involved in putting a failing TBTF bank through bankruptcy, Plosser acknowledged that while it's an "obstacle," it needn't lead to his plan being ignored.

"One possible solution is for global financial firms to declare a single jurisdiction under which bankruptcy would be administered," he said. While this would require coordination, "contrary to some claims, however, we don't really require a full harmonization of bankruptcy regimes across nations."

Rather, he said, "it is enough to seek agreement about the creation of a special regime for financial firms. International firms do go through bankruptcy now, so I don't see this as an insurmountable task."

These firm rules are all the more important because regulators likely won't be able to spot the next crisis, Plosser said, echoing a sentiment voiced by other policymakers.

"Discretionary supervision and regulation alone are not sufficient to prevent excessive risk-taking or prevent future crises," said Plosser.

New York Dems Standing Strong For Wall Street

Ryan Grim   |   June 16, 2010   12:42 PM ET

House Democrats representing New York are making a last-minute push to defend the interests of the state's most profitable industry.

On Monday night, Gary Ackerman, a Democrat who represents Queens, told his fellow caucus members that if reform is too tough on Wall Street -- particularly, if it includes a tough derivatives proposal from Blanche Lincoln or a hardened Volcker Rule -- the 26 members of the New York delegation may abandon the party on a final vote. He claims that reduced profits for Wall Street translates into lower tax revenue for the state and city, which hurts all New Yorkers.

That would leave Speaker Nancy Pelosi (D-Calif.) with only a few votes to spare, with plenty of other opposition from within her caucus still left to overcome.

The conventional understanding of the congressional equation is that the Senate, with its requirement of 60 votes to overcome a filibuster, is the limiting factor. But the House is proving a more difficult obstacle.

Beyond the insurgent New York Democrats, the New Democrat Coalition objected to the Lincoln proposal in a letter to colleagues Tuesday. Rep. Debbie Wasserman Schultz (D-Fla.), meanwhile, has garnered more than a hundred signatures for a letter objecting to the Senate's effort to reduce the exorbitant swipe fees that banks charge merchants to use credit and debit cards. And on Tuesday, House conferees successfully fought off Al Franken's measure, approved by the Senate, that would end the conflict of interest created when banks choose which credit rating agency will evaluate which deal.

The New York delegation may be the most immediate problem. "Those of us in New York represent not only Main Street, but Wall Street, as well, and understand very much that Main Street is affected by Wall Street," Ackerman told HuffPost. "I've spoken to the mayor, and I've taken it on myself to try to rally the troops."

House Financial Services Chairman Barney Frank (D-Mass.) told HuffPost he has encouraged the New York effort regarding Lincoln's language. "It's a legitimate concern of theirs and I told them they should keep arguing," said Frank.

Ackerman's comments were first reported in HuffPost Hill, an evening newsletter, on Tuesday, and already an online petition has been launched by the Progressive Change Campaign Committee targeting him.

"Watering down this bill is unacceptable," said Aaron Swartz, PCCC co-founder. "If Gary Ackerman, Chuck Schumer, or anyone else is even thinking about putting their Wall Street campaign contributors ahead of Main Street, we're putting them on notice right now: We will let their constituents know they are sell-outs and we're perfectly fine making a national example out of them."

The New York delegation doesn't often vote as a bloc like the Blue Dogs or New Democrat Coalition, but when it comes to Wall Street, Ackerman said, it's willing to use its sizable influence. "We're missing the tickling guy, so we're down to 26 [members] instead of 27," said Ackerman, referring to Rep. Eric Massa (D-N.Y.), who resigned amid a pile a giggling staffers. "We don't always vote in a bloc on an issue, but this is a highly charged, very important economic matter for New York. Wall Street is one of our umbilical cords, it's the oxygen. You can replace alfalfa by growing snow pea pods, I guess; cattle by raising sheep, but what do you put in all those buildings in and around the city that are dominated by the banking industry? It's not grazing pasture land."

Ackerman is garnering signatures for a letter from the New York delegation to Frank pushing back against the Volcker Rule and the derivatives proposal. He said he expects to have nearly every member of the delegation sign the letter.

The New York uprising is one example of the way that the structure of the House works against meaningful national reform. More than three dozen Democrats sit on the House Financial Services Committee and nearly all of them demand special treatment for regional interests. "What's happening now is the pro-regulation forces are being out-grassroots-ed by the antis," Frank told HuffPost in the fall as his committee considered the bill. One member, he said, represented tons of title insurance companies. Another came from the headquarters of credit unions. A third's district was home to LexisNexis; another to Equifax.

"I have not had a problem because of campaign contributions. The problem is democracy: it's people responding to people in their districts: community bankers, realtors, auto dealers, as I said, end users, insurance agents," said Frank. Add New Yorkers to that list.

The Senate, by contrast, is much less burdened by the principles of democracy. Because each state gets only two senators, Wall Street's home state has the same number of votes as Wyoming. Both New York senators, to the dismay of Wall Street, have been advocates of reform -- or, at least, haven't been active opponents.

"There's a different political dynamic in the Senate. Where the happy number for the devil is 666, the happy number for the Senate is 60. They're very focused on getting 60 votes for anything. But there's a reality that sets in in the end of the process that deals with not just passing it in one house, like the Senate, but it's something that has to pass -- be acceptable to the House and the majority of the conferees," said Ackerman, explaining Chuck Schumer and Kirsten Gillibrand's support for the final bill in the Senate.

The delegation has a variety of problems with the evolving legislation. The Volcker Rule is intended to stop banks from trading for their own profit with taxpayer-backed money.

Ackerman said that declining profits for Wall Street would mean smaller local tax revenues and less money circulating through the New York economy in general. Ackerman said he and his delegation colleagues are fighting to make the bill that emerges from conference "much more reasonable. And to make it New York-friendly."

The delegation is making progress toning down the Volcker Rule, said Ackerman, but is waiting to see final language before deciding if it's something they can support. "We could live with Volcker, depending on how it gets defined, and that language is described right now. We're trying to work out something that accommodates those of us who have New York specific concerns," he said.

Lincoln's piece has less room for improvement, he said. Dropping it would be better. "If we could get rid of it," he said, "that would be the ideal, but we're looking to tame it in a way that makes sense."

The New Yorkers will have help from the New Democrat Coalition, a group of Wall Street-friendly lawmakers who worked to soften reform in the House when it first went through.

The coalition is currently gathering signatures for a letter objecting to the Lincoln proposal, pushing for exemptions to the derivatives language and arguing for a loose interpretation of the Volcker Rule.

The New Dems ally themselves with the administration in their opposition to Lincoln. "[W]e agree with leading regulators and Administration officials, including former Chairman Volcker and current Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Timothy F. Geithner, SEC Chairwoman Mary L. Schapiro and FDIC Chairwoman Sheila C. Bair, who have all expressed opposition to Senate Section 716 - also known as the 'swaps desk spinoff' - that would increase systemic risk by forcing derivatives transactions into less regulated and less capitalized institutions and impede effective regulatory oversight of the derivatives markets. Legitimate conflict of interest concerns are addressed by the ban on proprietary trading in the Volcker Rule, and, accordingly, we believe Section 716 should be removed from the legislation," reads the letter, a copy of which was reported in Tuesday's HuffPost Hill.

Advocates of reform are warning Democrats that sticking up for Wall Street now could cost them in the fall. "During the Senate debate, we saw the bill grow stronger than the House bill as senators started listening to their constituents and big bank lobbyists got shut out of the process," said Ilyse Hogue, director of political advocacy and communications at MoveOn.org. "So if House members think they're going to be able to undo that progress at the behest of Wall Street lobbyists, they're in a for a nasty surprise in November, especially given how open the lobbyists have been about who their targets are to do their bidding in conference."

UPDATE: Americans for Financial Reform is pushing back against the New Dems, sending this letter to Congress rebutting the New Dems' claims.

UPDATE II: The New York Daily News has has the letter from Ackerman.

Another Fed Official Supports Plan Forcing Banks To Spin Off Derivatives Units; Obama's Treasury STILL Opposed

Shahien Nasiripour   |   June 16, 2010   12:00 PM ET

The president of the Federal Reserve Bank of St. Louis supports a Senate plan that would force Wall Street megabanks to spin off their derivatives units and raise significantly more capital to cover their bets, becoming the third Fed official outside Washington and New York to support a hotly contested measure that's turning into a Wall Street versus Main Street issue.

James Bullard, the St. Louis Fed chief, joins Dallas Fed President Richard Fisher and Thomas Hoenig, who heads the Kansas City Fed, as the three Fed officials who publicly support the provision, authored by Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark.), according to one of his spokesmen. The Obama administration and the Fed's Washington-based Board of Governors oppose the measure and are working to kill it.

Bullard's support is key to a measure vehemently opposed by Wall Street. The plan would force financial behemoths that run their swaps-dealing operations out of their banks to reorganize those desks into separately-capitalized affiliates, compelling them to collectively raise tens of billions of dollars in capital to back up potential losses.

JPMorgan Chase, Goldman Sachs, Bank of America and Citibank are the biggest dealers in over-the-counter swaps in the country, according to the most recent figures from the Office of the Comptroller of the Currency. Swaps are a type of derivative contract.

Last week, Hoenig and Fisher sent letters of support to Lincoln, referring to her measure as one "of utmost importance to our nation's long-term financial and economic stability." Though Bullard supports the measure, he's presently out of the country and unavailable for comment, said Robert J. Schenk, a senior vice president in charge of public affairs at the St. Louis Fed.

The three regional Fed chiefs represent the Fed and bankers in the broad middle of the country stretching from Kentucky to Colorado. Bullard and Hoenig are voting members of the Fed's main policy-making body, the Federal Open Market Committee. The FOMC sets the main interest rate, the federal funds rate.

Meanwhile, Treasury, led by Timothy Geithner, representing the White House, and the Fed's Board of Governors, led by Ben Bernanke, find themselves on the side of Wall Street money center banks.

"It shows the access of the major Wall Street banks in the Treasury Department in spades," one Senate aide told the Huffington Post earlier this week on the condition of anonymity. "I think this shows that the [Fed's] Board of Governors and Treasury are out of touch with how a lot of other people are thinking about this stuff."

House Speaker Nancy Pelosi is among the provision's more high-profile supporters. Federal Deposit Insurance Corporation Chairman Sheila Bair opposes it, though spokesman Andrew Gray says the agency is "optimistic our concerns can be addressed."

Bair believes banks should be able to hedge against interest rate and currency risk for themselves and their customers. During a May 5 speech on the Senate floor, Lincoln said banks can continue to do exactly that even if her proposal is adopted into law.

"Banks that have been acting as banks will be able to continue doing business as they always have," Lincoln said. "Community banks using swaps to hedge their interest rate risk on their loan portfolio will continue to be able to do so. Most important, we want them to do so."

This week, Lincoln sent around Capitol Hill a possible clarification to her provision. The legislation will still allow banks to appropriately hedge against changes in interest rates and currency valuations, and will be able to continue to offer swaps to customers in conjunction with traditional bank products like loans, according to her office.

Other supporters of her measure include the Independent Community Bankers of America, the Consumer Federation of America, AARP, and various labor unions and leading economists, including Nobel Prize-winning economist Joseph Stiglitz.

House Agriculture Committee Chairman Collin C. Peterson indicated his support for the measure last week during House-Senate negotiations over combining the chambers' separate versions of financial reform legislation.

Earlier this week, a White House spokesman said of Lincoln's spin-off measure that "we continue to see this specific provision as only one small piece of the sweeping derivatives reform that Senators Dodd and Lincoln and Chairman Frank have championed."

Lincoln's measure aims to "let banks be banks," supporters say, by forcing them to shed their riskiest Wall Street operations from the deposit-taking bank. Banks are explicitly supported by taxpayers in the form of federal deposit insurance and access to cheap funds from the Fed's discount window. Supporters argue that taxpayers shouldn't subsidize banks' swaps dealing when they're not offered to customers wishing to hedge risk in conjunction with traditional banking products.

By forcing megabanks to divest their units into separate affiliates, which in turn would compel them to raise money to capitalize these affiliates, Lincoln's measure could force them to scale down their operations. At the least, supporters say, it would force them to have enough cash on hand in case their bets began to sour, saving taxpayers from having to step in to prop up the banks like they did in 2008 -- an explicit level of support that continues today.

An e-mailed request for comment from Treasury was not immediately returned.

House Fighting Senate Over Appointment Of New York Fed President

  |   June 15, 2010    3:50 PM ET

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A Portrait of Unemployment, Foreclosure and Family Discord

Janis Bowdler   |   June 15, 2010    3:02 PM ET

This is the second installment of a five-part series titled Too Little to Save, in which the National Council of La Raza (NCLR) highlights a family and describes their struggles with foreclosure.

A husband, a pregnant wife, and a five-year-old son: This is the Nunez family of northwestern Georgia. The parents watched their employment hours dwindle, and after losing their main source of income, they ultimately confronted the prospect of losing their home. While searching for jobs, Mr. and Mrs. Nunez petitioned their bank to help them until they found employment. Mr. Nunez said the bank was not helpful:

I sent a letter to the bank explaining my case... They told me that they couldn't help me and that I had to pay about $12,000. I wasn't able to get any help from them. There was no program back then that could help people who were in my same situation. So I had to go into foreclosure.

Mounting frustration weighed on the Nunez household. They lost their home and moved from place to place, sparking contention between the parents.

I think that what has been affected the most is the relationship between me and my wife. We almost got divorced. We keep thinking about the instability for our son, and it has been very difficult for us.

Unemployment, foreclosure, and a sense of hopelessness entirely derailed the Nunez family from a prosperous path and provoked the unraveling of their family bonds.

We could see that all of our efforts [with the bank] were useless. There was a lot of tension... Today my son asked me again, "Why are you undoing my bed? Are we going to another house?" I mean, it's difficult as a parent [to go] from one place to another wanting to be stable.

Unemployment is now the leading cause of delinquency for families facing foreclosure. Foreclosure, however, does not have to be the inevitable consequence of losing a job. Nowadays, many families might experience an extended bout of unemployment lasting eight months or longer. Most of them are not aware that there may be options other than foreclosure during employment dry spells.

During the next few days, legislators will decide on a foreclosure prevention provision included in the banking reform bill. It could help many hundreds of thousands of homeowners prevent needless foreclosures due to temporary unemployment and fill a major gap in current foreclosure prevention efforts. NCLR strongly encourages the Conference Committee to support this provision and create a loan program for jobless homeowners.

The ten hardest-hit states have already received funds to develop their own programs to help unemployed homeowners with underwater loans. These programs need to be extended on a national level. Such unemployment services could represent the reprieve families need during these tumultuous times. We know well that a series of foreclosures can be a neighborhood's demise. If the Nunez family had received extended benefits, they would have had more time to secure work, hold on to their home, and retain their wealth for future generations.

Has your life been affected by the risk of foreclosure? If so, please share your experience. Contributing to this project will help decision-makers to better understand the depth of this continued foreclosure crisis and take better steps to address it. Your personal story could impact their decisions.

Click here for the previous installment of Too Little to Save.

Volcker: New Government Powers Won't Be Able To Dismantle Megabanks; Too Big To Fail Lives Despite Reform Bill

Shahien Nasiripour   |   June 15, 2010   12:30 PM ET

Updated at 5:45 p.m. ET.

Former Federal Reserve Chairman Paul Volcker believes the centerpiece of the administration's effort to end Too Big To Fail -- the perception that the nation's largest banks will always be bailed out when in trouble -- will not actually apply to megabanks.

In a September 2009 speech on Wall Street, President Barack Obama said that the administration's preferred way to dismantle failing systemically-important firms is a new "resolution authority" outside the normal bankruptcy process. The authority, which would enable regulators to wind down failing financial behemoths, "is intended to put an end to the idea that some firms are 'too big to fail,'" Obama said.

His top economic adviser, Lawrence Summers, has said that ending Too Big To Fail is the administration's "central objective" in reforming the financial system, and that resolution authority is the "most crucial" part of that plan.

But on Monday, during a discussion on CNBC, Volcker, the head of Obama's Economic Recovery Advisory Board, said the proposed authority is a "workable proposition for anything short of these biggest banks."

The Senate and House financial reform bills feature the resolution authority as a way to end TBTF. The bills are based on Obama's June 2009 blueprint for reforming the financial system.

According to Volcker, it isn't "workable" for the nation's megabanks.


WATCH Volcker on CNBC:



Volcker appeared on the program with William Isaac, the former chairman of the Federal Deposit Insurance Corporation, who added that the legislation is "not going to prevent the top five banks from being saved."

"We will save them," Isaac said. Speaking about a potential future financial crisis, the former bank regulator said that Congress "would jump in with more legislation to bail out those banks. I don't have any doubt about that," he added.

In a recent report, Moody's Investors Service voiced similar concerns about the legislation's attempt to end the perception that policymakers won't step in to bail out the nation's largest and most interconnected financial institutions.

The criticism from two former top bank regulators also echoes recent remarks by Federal Reserve Bank of Dallas President Richard Fisher, who argues that the bill doesn't come close to ending TBTF. Rather, he believes the nation's megabanks either need to significantly shrink, or be broken up.

In an April speech about the financial crisis and the need for fundamental reform, Assistant Treasury Secretary for Financial Institutions Michael S. Barr said "we must end the perception of 'too big to fail.'"

"Without reform, the expectation that some firms are too big to fail will survive," he said. Barr added that the Senate bill, largely authored by Banking Committee Chairman Christopher Dodd with heavy input from Treasury, "contains strong measures to put an end to the perception that some firms are 'too big to fail.'"

The candid talk, however, from two former top regulators, including the revered Volcker, whose various reform proposals have been embraced by the White House and have made him a darling in the pro-reform community, calls into question the veracity of the administration's claim that the pending legislation before Congress will truly end TBTF.

Critics of the legislation, including Fisher and the president of the Kansas City Fed, Thomas Hoenig, argue that it doesn't end TBTF because it lacks a credible threat that policymakers won't step in with a bailout when a megabank faces failure. Some, like former chief economist of the International Monetary Fund and current HuffPost contributing editor Simon Johnson, point to the unwieldy international coordination issues involved in dismantling a failing firm with vast international reach during a time of distress. Isaac said on CNBC that "we have five banks that control over 50 percent of the banking system. No government can allow very large banks that control over half the financial system to go down."

And according to Volcker, the proposed resolution authority just won't work for the nation's biggest banks.

In March, Geithner dismissed the other alternative, bankruptcy.

"I do not believe there is a credible alternative to this basic structure," Geithner said of the proposed resolution authority. "The normal bankruptcy regime cannot work for banks, because banks need funding to operate even as they are being wound down. Without funding, they would have to liquidate in a disorderly manner. In a crisis, there is no plausible private source of temporary financing, like debtor in position financing, for companies in bankruptcy."

That leaves taxpayer-financed bailouts as the only option to deal with failing systemically-important firms.

Such firms -- which many observers believe to be Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley, among others -- enjoy the support of an implicit government backstop. This allows them to issue debt at a lower cost than their competitors because their creditors credibly believe that they'll be bailed out should times get rough. Collectively, the firms save billions of dollars a year thanks to this implicit government guarantee.

"[E]nding the existence of TBTF institutions is certainly a necessary part of any regulatory reform effort that could succeed in creating a stable financial system," Fisher said earlier this month. "It is the most sound response of all. The dangers posed by institutions deemed TBTF far exceed any purported benefits. Their existence creates incentives that will eventually undermine financial stability."

BofA, JPMorgan, Citi, Wells, Goldman and Morgan -- 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 e-mail sent to a Treasury Department spokesman requesting comment was not immediately returned.

Andrew Williams, a Treasury Department spokesman, referred the Huffington Post to five statements since October from senior agency officials that reflect Treasury's position on the proposed legislation and its ability to end TBTF. In short, the agency strongly believes that it does.

The resolution authority proposal is "a bit of a red herring" when it comes to credible ways to end TBTF, said Heather McGhee, Washington director of Demos, a public policy organization. It won't work, she said.

While McGhee believes the resolution authority could be effective for some systemic firms, like the former Bear Stearns or Lehman Brothers, she agrees with Volcker that it wouldn't work for the large banks that dominate the nation's financial system, like JPMorgan Chase, Citigroup, Bank of America and Wells Fargo.

She argues that megabanks need to shrink or be broken up, which is why she supports a reinstatement of the Glass-Steagall Act -- a Depression-era law that prohibited commercial banks from engaging in investment bank activities, and vice-versa -- and why she fought for a provision pushed by Democratic Senators Ted Kaufman of Delaware and Sherrod Brown of Ohio that would have dismantled the nation's biggest banks. The Senate voted it down.

With the White House pushing to sign the bill into law by July 4, McGhee said that at this point she's concentrating on measures that would help prevent the nation's financial behemoths from needing a bailout in the first place.

She points to the Volcker Rules, named after the former Fed chairman, which would prohibit banks from making bets with their own capital for their own profit; Senate Agriculture Committee Chairman Blanche Lincoln's proposal that would force the megabanks to reorganize their derivatives units in separately-capitalized affiliates, which would force them to raise even more capital to guard against losses and potential failure; and the portion of the Senate bill that deals with derivatives, which she argues will clamp down on the under-regulated derivatives dealing and trading on Wall Street.

They're the "three most important measures to prevent bailouts," McGhee said, because they'll change the way financial giants conduct business so they'll never get to the point of failure.

But better regulation alone won't end TBTF.

"No financial regulatory system will ever be perfect. Financial firms will always overreach and get into trouble," Geithner told a House panel in April.

"[B]ecause government oversight alone will never be sufficient to anticipate all risks, increasing market discipline is an essential piece of any strategy for combating too-big-to-fail," Federal Reserve Chairman Ben Bernanke said in March. "To create real market discipline for the largest firms, market participants must be convinced that if one of these firms is unable to meet its obligations, its shareholders, creditors, and counterparties will not be protected from losses by government action.

"To make such a threat credible, we need a new legal framework that will allow the government to wind down a failing, systemically critical firm without doing serious damage to the broader financial system.

"In other words, we need an alternative for resolving failing firms that is neither a disorderly bankruptcy nor a bailout," the nation's central banker added.

"We must have it when the next big financial firm gets into trouble," Geithner said in April.

But according to two former top bank regulators, it just won't work for the nation's largest banks.

Franken Battling Frank On Wall Street Reform

Ryan Grim   |   June 15, 2010    9:33 AM ET

Al Franken is battling Barney Frank to save the life of a credit rating agency amendment that the freshman Minnesota Democrat was able to include in the Senate's Wall Street reform bill. Franken would bar banks from choosing which rating agency can rate which product -- the current system creates conflicts of interest leading to artificially rosy ratings. Under Franken's proposed system, raters would be assigned randomly to a financial institution, leaving them with the freedom to issue a poor rating without fear of losing business -- raters who are more accurate will get more business.

The House bill does not contain a similar measure and Frank, chairman of the House Financial Services Committee, says the amendment is untested and is offering Franken a study of the issue instead. Franken thinks a study isn't needed. Debate on Franken's measure begins at 11:00 a.m. Tuesday, when the conference committee convenes.

"The House language is very concerning. We don't believe a study is necessary," said Franken spokeswoman Jess McIntosh. "We know what went wrong with Wall Street's credit rating system -- conflicts of interest eroded it by rewarding cozy relationships instead of accuracy. And we know how to fix it -- the Franken amendment that passed the Senate with broad bipartisan support. The upside of a study is that they usually end with findings. And you can be sure that if such a study came back, it would confirm the conflicts of interest. It just makes more sense to end the delay and instate the reform now."

Steve Adamske, spokesman for Frank's committee, reacted sharply to McIntosh's defense. "The time for debate will be tomorrow at 11:00 am, not through the press by spokespeople protecting the people who sign their paycheck. Mr. Franken needs to talk to his Senate colleagues," Adamske told HuffPost Hill Monday evening.

Franken, notes McIntosh, did send a letter, also signed by Sen. Carl Levin (D-Mich.) and Roger Wicker (R-Miss.), addressed to conference committee leaders, including Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.).

"As the Permanent Subcommittee on Investigations clearly revealed in its April 23, 2010, hearing, the credit rating industry is plagued by conflicts of interest, in which the issuing banks pay credit rating agencies to rate their financial products. In order to retain clients, credit rating agencies have an incentive to provide inflated rating to even the riskiest products," reads the letter. Levin is chairman of the investigations committee.

Heather Booth, head of Americans for Financial Reform, said that her group is urging the conference to adopt Franken's measure, which has bipartisan support.

Don't Forget the Kanjorski Amendment

Simon Johnson   |   June 14, 2010    9:00 AM ET

Substantive discussion in the House-Senate financial reform reconciliation conference is focusing on the Lincoln amendment, with some back-and-forth on the Volcker Rule (as manifest in the Merkley-Levin amendment). The FT reports today that Paul Volcker is no longer opposed to the Lincoln approach - now it has become clear that this is really just about (substantially) raising the capital that banks need to back derivatives trading. And the influential Tom Hoenig, of the Kansas City Fed, appears to be strongly in the Lincoln camp.

While our most experienced regulators weigh in, the lobbyists start to struggle. The mobilization of broader support against gutting the legislation also helps - the earlier Senate debate has raised sensitivity levels and there is a new concentration to the public scrutiny. The reconciliation process itself is much more open than would ordinarily be the case -- a result of outside pressure.

But amidst all this excitement and potential moving parts, don't forget about the Kanjorski amendment (not currently on the list of most prominent topics).

The Kanjorski amendment would greatly strengthen the hand of regulators vis-à-vis big banks and further reinforce their power to break up those banks. This is not, unfortunately, the same thing as the Brown-Kaufman amendment, which would have broken up the largest six banks outright.

Still, the Kanjorski amendment is important for the next time that one or more major banks get into serious trouble. Judging from their current swagger and the slogans you hear from top bankers ("our risk management is now simply amazing"), we only have to wait a few years for the next bailout cycle.

A great deal of discretion would remain with the regulators, and of course this is a potential danger. But the heightened public awareness of the idea that "bailouts are bad" at least increases the chances that management and directors would be replaced in a failing megabank. Whether creditors would face any losses remains a more open question - but at least the Kanjorski amendment, if applied properly, would put that possibility firmly on the table.

Brown-Kaufman was turned back on the Senate floor, but the Kanjorski amendment is an integral part of the financial reform bill that passed the House. And Congressman Paul Kanjorski is a formidable member of the House conference delegation.

When you argue and push hard this week for the Lincoln amendment and for Volcker-Merkley-Levin, don't forget to also push for the Kanjorski amendment.

This post originally appeared at the Baseline Scenario.

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Swipe Fee Amendment Hated By Credit Cards Will Remain In Wall Street Bill, Says Dodd

Ryan Grim   |   June 8, 2010   11:41 AM ET

A provision despised by credit card companies will remain in the final Wall Street reform bill that emerges from conference committee negotiations, Sen. Chris Dodd (D-Conn.) told reporters Monday evening.

Dodd, who is leading conference negotiations for the Senate, said that changes will likely be made to the "swipe fee" amendment that was included in his chamber's version. Sponsored by Sen. Dick Durbin of Illinois, the number two Democrat, the amendment would reduce the fees that credit card companies can charge to retail stores for using the cards. The current fee far exceeds the cost of the transaction, which stores pass on to consumers. The fee is a lucrative source of revenue for credit card companies and hated by merchants.

Once the amendment was adopted, the trade association representing merchants endorsed the reform effort. It has long been a priority of the merchant lobby but they have had little success until now.

"We didn't even try to deal with that in the credit card bill a year ago because it is complicated," said Dodd. "But right now consumers get whacked because of how retailers are treated by the credit card industry."

Durbin has been in discussions with Financial Services Committee Chairman Barney Frank (D-Mass.) to win House backing for his provision.

Consumer advocates drove support for the measure. "In North Dakota, I had thousands of constituents contact me asking me to vote for the Durbin amendment," said conservative Democratic Sen. Kent Conrad, calling the credit-card fee provision "very important."

Dodd said the current system is untenable, but Durbin's provision will be adjusted. "There's been an effort to narrow things in a way that may need a little more work before it's done. But I can't imagine that provision coming out of this bill. Literally there are million of retailers who pay an awful price every day for the surcharges that affect salaries by the credit card industry. So I think it's going to stay with some modifications," Dodd said.

Lucia Graves contributed reporting