Given the financial sector's leading role in the Great Recession, it is not hard to justify a complete re-write of their rules of conduct. Last spring the Obama Administration offered their framework for reform and in December the House passed a sweeping reform bill that included, among many other provisions, the establishment of an independent and stand-alone Consumer Financial Protection Agency (CFPA). Since then, all eyes have been fixed on the Senate. Chris Dodd, as chair of the Senate Banking Committee, was to push comprehensive reform over finish line as one of his last acts before he retires at the end of the year.
Knowing he needed a few Republican votes to overcome the inevitable filibuster, Dodd established a series of bipartisan working groups which would focus on various aspects of the bill. In past eras, such an approach was commonplace. Today, it is novel. Even as this process generated a series of consensus provisions, no Republican member of the committee came out in support of the package. One particular sticking point was the proposal for the consumer agency. Many advocates, such as the articulate Elizabeth Warren, argued that creating a strong and empowered watchdog was needed to revamp the incentives toward safer, more transparent, and fair financial products. The U.S. Chamber of Commerce unleashed its corporate voice (and money) in a full-throated campaign to "stop the CFPA."
In recent weeks, a series of potential compromises were floated in an effort to attract some Republican support for the bill. First, the agency would not be independent. Then, several ideas about alternative placements were leaked, first in Treasury, and then within the Federal Reserve, which nominally already has consumer protection responsibilities and their failure to prioritize this work was one of the factors that got us into this mess in the first place. Next, Dodd's negotiating partners were pushing hard to roll back the purview of the watchdog to protect the scores of payday lenders and check cashers whose high-cost and low-value products have largely escaped any scrutiny from regulators. Their increased campaign contributions were designed to keep it that way. Finally, the talks broke down. On Monday Dodd released a draft bill without any Republican colleagues standing by his side.
So the next two questions to ask are: what's in the bill and where to we go from here.
The bill has 11 titles and clocks in at a not so svelte 1,336 pages. You can read a summary of it here or knock yourself out and go line by line here. By almost any standard, this is a significant proposal. It is not hyperbole when Dodd describes this bill as the largest reform to our financial system since the 1930s. There is a reshuffling of bank regulators and the creation of a system-wide risk assessment authority with power to break up and dissolve firms that are failing or too big to fail. There is a new set of corporate governance rules designed to increase transparency and give shareholders a say on corporate pay and a new set of rules to hold crediting agencies accountable for their work. There are provisions that would increase scrutiny of hedge funds and over-the-counter derivatives. In other words, there are a lot of moving pieces.
But it is clear that as the process has played out, Dodd decided to retain many of the compromises forged by his bipartisan process. This is best illustrated by looking at how he handled the consumer protection issue. All of the advocates pushing to consolidate consumer protection responsibilities to oversee the entire landscape of financial services were pushing for stand-alone agency. This was in the House bill and was seen as a key to successful reform. Dodd accepted placing it within the Fed as a "Bureau" and was listening to proposals to water it down considerably. But at some point enough was enough. A number of provisions in the bill reinforce the autonomy of this bureau. It has a presidentially-appointed director, its own budget, the ability to write rules, and "potential" enforcement power over a wide range of financial services and products. But if it is just paying rent to the Fed, perhaps it should be on its own after all.
I am not completely adverse to a Fed compromise. In fact, some of the provisions in the bill are better than I expected when the idea was first floated as a potential compromise last week. Others are cause for concern. Specifically, there are limits on Bureau being able to directly enforce its rules with smaller banks (that is being left to the formal banking regulator), there is an appeal process which seems to grant "veto power" to a council of regulators whose primary concern is not consumer health but bank health, and there are initially limits on the oversight of the non-bank sector, such as the provision of payday loans and check cashers. It should be made crystal clear at the beginning of the process that it is the intent of this effort to extend consumer protections into this segment of the market. Interestingly, the White House made this exact point in their statement released just after Dodd's press conference. The President followed up his State of the Union veto threat by saying:
"And I will not accept attempts to undermine the independence of the consumer protection agency, or to exclude from its purview banks, credit card companies or nonbank firms such as debt collectors, credit bureaus, payday lenders or auto dealers."
I'll be digging further into the details of this title over the next few days (that part of the bill is only about 300 hundred pages). But as this process moves forward I will have three main criteria to judge if it is moving in the right direction. The non-bank providers of financial services (check cashers and payday lenders) have to be covered, rule-making authority and enforcement mechanisms must be extensive and substantial, and the federal government must set a floor and not a ceiling for standards so other state and local authorities can be empowered to act quickly to shut down abusive practices.
So, where to now? Will Dodd continue to negotiate with himself or will he find a good faith partner? Will the process lead to passing a bill or just a dynamic campaign issue for the mid-term elections?
The bill can be modified during the committee mark up and then moved on a partisan basis to the Senate floor, where it may be able to pick up a few Republican votes. Perhaps Scott Brown wants to avoid a campaign against Elizabeth Warren (who is a long-time Massachusetts resident). Perhaps Olympia Snowe or Susan Collins may see the merits in breaking with their party. Maybe Bob Corker, Judd Gregg, or Shelby can find a way to vote for a bill that reflects some of their work hammered out in the negotiating process.
But when a final deal is struck, the details will matter. The President is right to establish some benchmarks. Let's see if the Senate (and Chris Dodd) can clear them.