Senator Dodd Says Market Plunge Illustrates Need for Financial Overhaul

Senator Christopher Dodd, who is steering the financial-overhaul bill through the Senate, said last week’s market plunge illustrates the need for the legislation, which is aimed at detecting and alleviating developments that could disrupt the economy.

“We need to get in place our bill, have the president sign it, so we have the tools to protect our economy from these kind of events,” Dodd, a Connecticut Democrat, said in an interview on CBS’s “Face the Nation” program. “Our bill is designed to deal with these early warning systems.”

Dodd, the chairman of the Senate Banking Committee, said his panel will hold hearings on the market drop. The Securities and Exchange Commission has “to step up very quickly” to explain what caused the stock plunge and how it should be addressed, Dodd said.

U.S. regulators and exchanges are trying to determine what happened after stocks fell May 6, temporarily erasing more than $1 trillion in market value, in a rout fueled by waves of computerized trading. The SEC and Commodity Futures Trading Commission said in a joint statement on May 7 that declines for individual stocks were “inconsistent” with well-functioning markets and pledged to make “structural” changes if necessary.

“I believe what’s really happened is the technology has gotten ahead of the regulators, and the regulators have got to get ahead of the technology,” said Alabama Senator Richard Shelby, the banking panel’s top Republican, who appeared on the CBS program with Dodd. “That’s going to be a big challenge down the road. Otherwise, we could have more of this.”

Senate Debate

Dodd’s legislation to redesign the architecture for U.S. regulation of the financial industry is being debated in the Senate. It would create a council of financial regulators to identify systemic risks posed by activities, large companies and products that could threaten economic stability. The bill creates an Office of Financial Research at the Treasury Department to support the council by collecting and analyzing financial data.

Dodd and Shelby, the lead negotiators on the financial bill, last week reached a compromise to strengthen language in the legislation aimed at preventing future bailouts of large financial firms in an effort to allay Republican concerns that the measure didn’t go far enough.

Voter Outrage

Lawmakers are responding to voter outrage over the $700 billion taxpayer-funded rescue package Congress approved in 2008 to help companies, including American International Group Inc. and Citigroup Inc. Dodd’s deal with Shelby allowed the Senate to begin voting on amendments to the measure, which is based on a proposal released last year by President Barack Obama.

The Senate will continue debating amendments this week, with votes expected as early as May 11 on an amendment that calls for a one-time audit by a congressional watchdog of the Federal Reserve’s emergency-lending programs during the financial crisis and another that would end the government’s conservatorship of mortgage giants Fannie Mae and Freddie Mac two years after the bill’s enactment.

Senators are expected to offer amendments to alter language in the bill dealing with derivatives oversight, the most contentious issue still left to be resolved. At issue is a provision that would require JPMorgan Chase & Co. and about a dozen other lenders that dominate the $605 trillion over-the counter derivatives market to wall off swaps trading from their commercial-banking operations.

Shelby Amendment Rejected

The Senate last week rejected an amendment offered by Shelby that would have created a consumer division at the Federal Deposit Insurance Corp. while allowing bank regulators to retain the power to enforce consumer-protection rules at U.S. banks. Dodd’s bill calls for setting up a consumer-protection bureau at the Federal Reserve with authority to police banks with more than $10 billion in assets for credit-card and mortgage lending abuses.

The Senate approved an amendment that would extend whistleblower protections for employees of Moody’s Investors Service, Standard & Poor’s and other credit-rating companies. Another amendment agreed to by the Senate would require the FDIC to change the calculation for the fees it collects from banks to support the deposit insurance fund. The FDIC would base the fees on assets instead of deposits, a change sought by smaller banks that would require bigger banks to pay more.

Dodd’s bill would boost oversight of hedge funds, ban proprietary trading at U.S. banks and give the government new power to disassemble failing financial firms that are so large and interconnected that their collapse could disrupt the economy.

The bill is similar to a measure the House of Representatives approved in December. If it is passed by the Senate, it would have to be merged with the House bill before the president can sign it into law.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

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