U.S. embassy and consulate websites or www.state.gov.
We’ve gone social!
Follow us on our facebook pages and join the conversation.
05 February 2010
In U.S. Congress, Financial Reform Is a Work in Progress
Washington — A comprehensive regulatory overhaul designed to make the U.S. financial system less prone to crisis faces uncertainty as interested parties, policymakers and legislators maneuver for opportunities to push it through Congress, change it or kill it.
In the Senate, Banking Committee Chairman Chris Dodd, a Democrat, unveiled in November 2009 a “discussion draft” (PDF, 275KB) and vowed to work with Republican members to produce a bipartisan bill. But in February Senator Dodd acknowledged that they had “reached an impasse” in negotiations. Nevertheless, he said he decided to begin drafting actual legislation in hopes of arriving at a consensus package. The key dividing issue is the Democrats’ idea of creating a separate consumer financial protection agency, which is opposed by Republicans and the financial industry.
The House of Representatives approved in December 2009 a financial reform bill (PDF, 25KB) supported by the White House that drew a “no” vote from every Republican member.
The Senate must pass a bill that emerges from the banking committee and the House and Senate versions must be reconciled before the president can sign legislation into law.
Both the Senate discussion draft and the House bill try to address what the lawmakers believe are the root causes of the financial crisis: an ineffective and complex regulatory structure; excessive risk-taking by big financial institutions whose failure could endanger the entire financial system; and insufficient government powers to deal with large failing banks and to protect consumers.
But the two efforts in Congress differ in how they deal with some key issues, making the potential task of resolving differences difficult. The Senate proposal, thus far, would abolish most existing regulatory agencies and transfer their authorities to one super-regulator; the House legislation would merge only three agencies and give key regulators enhanced powers. The Senate plan would create a new agency to identify and address risks to the entire system posed by big banks and complex products; the House bill would give such authority to the U.S. central bank, but make it share decisionmaking powers with other key regulators.
The loss by Democrats of a critical Senate seat in a January special election in Massachusetts deprives them of the assured path to legislative victories and “has created a lot of uncertainty about the legislative process,” said Reid Cramer of the New America Foundation, a Washington policy research organization.
The Republicans, having gained some leverage over Democrats, likely will extract concessions, according to Peter Wallison of the American Enterprise Institute, another policy research group. Nevertheless, Wallison said, Republicans are unlikely to obstruct the process to the point of killing the legislation. The November 2010 midterm congressional election puts pressure on them; they are not likely “to go to the voters without having something to say about what they might have done to address the financial crisis,” he said.
The Massachusetts election indicated popular dissatisfaction with the weak economy and with Wall Street excesses. President Obama has since advanced a plan to turn back the consolidation of the financial industry and to discourage commercial banks’ reach by capping their size, preventing them from engaging in risky proprietary trading and putting a size-related tax on them. In the January 27 State of the Union address, he reaffirmed his support for a strong financial reform bill and threatened to veto any legislation that comes short of his expectations.
The administration stance has triggered intensified lobbying by the big banks, which worry that the financial legislation may move in directions they least desire, according to the New York Times.
By directly confronting the big banks, Cramer of the New America Foundation said, Obama has provided a political cover for lawmakers from both parties to press ahead with the legislation and “not run away from the responsibility to govern and address the problems” for the sake of economic growth and financial stability.
Desmond Lachman of the American Enterprise Institute said the Obama plan would put reform on “a more desirable path” as it intends to make American banking more efficient and less prone to crisis. “But it doesn’t improve the prospects of getting legislation through, as it is likely to be a path that is heavily resisted by the banks,” he said.
Senator Dodd said the White House is “on the right track” with the new proposals. At a February 4 hearing, he lambasted large financial firms for their refusal to work “constructively” with Congress that he said “borders on insulting to the American people.” Only two days earlier, the senator expressed a somewhat different view, complaining that the plan makes the delicate negotiations more difficult by adding another layer of complexity.
During the hearing, industry representatives expressed misgivings about the plan. But a former top financial executive, who also testified, defended the administration’s proposals as well as a separate financial protection agency.
Cramer said the recent Obama comments add urgency to the legislative process and will broaden public awareness of the banks’ role “in bringing about the economic downturn.”
Most experts believe it will be difficult for Dodd’s bill to get through the Senate in its original form and that the Federal Reserve, the U.S. central bank, is likely to get its powers truncated or changed. Cramer predicted a consumer financial protection agency will be created while Wallison sees it as unlikely.
Obama continues to urge strong consumer protections, but in his recent statements he did not specifically mention the idea of a separate agency.
