Senator Christopher Dodd, the Connecticut Democrat who heads his chamber's Banking Committee, unveiled on Nov. 10 a sweeping, 1,136-page regulatory reform bill that would consolidate financial regulators, impose higher capital requirements on financial institutions, remake the derivatives industry, and shift consumer protection from an overlapping patchwork of regulators to a single new commission. But some in the financial-services industry aren't rushing to read it. "Given the shredding that committee is likely to give it in markup," says one banking analyst at a big money manager, "I think there are probably better uses of time." In many ways, Dodd's bill is a distinct departure from proposals floated by the Obama Administration and in the House of Representatives. And it has already drawn barbs from the banking industry and companies that use derivatives, both of which spend heavily to lobby Congress. But it remains a starting point for long and likely convoluted negotiations among the Senate's Democratic leadership, the Republicans who could block the bill with the help of just a few conservative Democrats, and the financial-services industry, which is regaining some of the clout it lost in the financial crisis. In other words, a lot will change before the Senate passes a regulatory reform measure—and then that measure still must be reconciled with the bills that Barney Frank (D-Mass.), the powerful chairman of the House Financial Services Committee, is crafting. Frank's legislation will surely differ substantially in at least some areas. Glimpse of Potential Final LegislationDodd and his allies acknowledged as much in introducing the bill at noon on Tuesday. "It's broad, it's deep, it's complicated; I look forward to the discussions," said Senator Jeff Merkley (D-Ore.). Senator Mark Warner (D-Va.) said simply: "There are parts of this bill that I think are going to need more discussion.…I look forward to not only working with our colleagues, but our colleagues on the other side of the aisle." And Merkley and Warner are among the bill's supporters. (They also praised many of the bill's features.) Dodd himself invited input from GOP senators. Still, the long-awaited legislation—Dodd has talked about introducing a comprehensive reform bill for months—offers a glimpse of some elements that are likely to survive in any final legislation that is passed. Dodd's proposals to reform the derivatives market look similar to those in the House Financial Services Committee's measure; both seek to push most derivatives trading onto exchanges, in an effort to improve transparency and market stability. "The guts of the derivative part is the same as the House bill," says Brian Gardner, a policy analyst for Keefe Bruyette & Woods (KBW) in New York.Dodd's consumer-protection proposal, too, contemplates a new standalone regulator, though overseen by a five-member panel instead of the single agency head proposed by the Administration and House. Tougher Proposed RegulationIn other areas, though, Dodd has staked out positions slightly tougher on financial-services firms than House legislation would impose—effectively forcing the financial industry to fight anew battles it had won in the House. For example, the Senate bill would require lenders to keep a 10% stake in the loans they slice up and sell to investors. While the House bill included a similar measure, it was toned down from an initial 5% retention requirement to an unspecified figure that would be set later by regulators. Dodd also proposes to combine federal banking regulators, replacing the Office of the Comptroller of the Currency and the Office of Thrift Supervision, as well as some duties of the Federal Reserve, with a new agency dubbed the Financial Institutions Regulatory Administration. The banking industry staunchly opposes such a consolidation, saying it would threaten the independence of thousands of smaller community banks. The Administration decided not even to pursue a full consolidation, for fear of an unproductive and bruising political fight; instead, it proposed only eliminating the OTS but preserving the thrift charter. In addition, the Dodd measure would give a panel of regulators—including the Treasury and Federal Reserve—power to monitor and rein in big or complex financial companies seen as posing a potential threat to the economy. A similar provision in House legislation leaves more of that authority in the hands of the Federal Reserve. Similarly, Dodd creates a different mechanism to dismantle big and complex firms when they begin to fail. Negotiating PositionAnd under the new proposal, the Federal Reserve's regional banks would no longer be overseen by a board many of whose members are picked by the banks they regulate. Instead, government-appointed governors would pick other board members. In all, the somewhat tougher stance taken by Dodd and his allies amount to a negotiating position. And by taking a tougher line, they hope to make sure they wind up with a tougher Senate bill once all the compromises are reached, notes one senior Senate staffer. "Everyone knows you're going to negotiate significantly to get the thing through the committee and through the Senate, and then the conference committee beyond that," the staffer says. "He clearly saw…there wasn't a way to get a true bipartisan proposal from the outset, and so saw no reason to negotiate with himself." Still, others see the proposal as little tougher than the House version. Simon Johnson, formerly the chief economist of the International Monetary Fund and a vocal critic of the financial industry, called it "repainting the deck chairs on the Titanic." Johnson, echoing some in the banking industry who dislike aspects of Dodd's proposal, noted that a single bank regulator in Britain did no better at preventing the financial crisis than the U.S. regulatory patchwork did. "It's good to see [Dodd] pushing the banks," Johnson says. But "banks always get ahead of regulators, and if they're big banks and they fail" it's disastrous.
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