Financial Reform Watch

Another Delay

Blank Rome Government Relations — Tue, 23 Feb 2010 20:25:14 -0500

Congress was in recess last week for the President’s Day holiday, but Senate Banking Committee staff remained focused on financial reform. Despite the fact that committee Chairman Chris Dodd (D-CT) was spending his break on a congressional trip to Central America – by happenstance with his new negotiating partner Sen. Bob Corker (R-TN) – the committee staff announced that the Chairman would release his “new wide-ranging bill" this week. As of today, that deadline has already slipped to the first week of March, meaning that the committee will not markup the legislation until the second or third week of March at the earliest.

We are hearing reports that the new draft will establish a council of regulators, led by the Treasury Secretary, responsible for monitoring systemic risk across the entire financial system. There have also been reports the draft will include provisions for a new bankruptcy-like system to wind down institutions previously considered “too big to fail.” The FDIC is expected to have a key role in that process.

Separately last week, Sen. Richard Shelby (R-AL), the committee’s Ranking Republican, announced that he was working on a Republican alternative to the Chairman’s financial reform draft. Shelby has made no public statements about Corker’s decision to work with Dodd, but the fact that Shelby is producing his own bill speaks volumes.

There is a lot of prognosticating right now. Corker’s positions are far more in line with Shelby’s than Dodd’s. The question is will Corker be able to convince Dodd to pass a streamlined bill that deals with a few key issues and tables the thorny issue of the Consumer Financial Protection Agency? Many industry experts are saying that Dodd and Shelby would have already worked out that deal if it was possible, and the Republican caucus is likely of the same mind, which puts Corker in a tough position. The outlook for financial reform continues to be very uncertain.

The Volcker Rule, Bipartisan Progress, and a Chance of Snow

Blank Rome Government Relations — Fri, 05 Feb 2010 09:58:42 -0500

Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) continue to work towards bipartisan agreement on at least some key elements of a financial reform measure. While the process has been a rocky one, both Senators appear to be working hard to find common ground. They appear to have found agreement on at least two things:

1. There will NOT be a stand-alone Consumer Financial Protection Agency. Rather, consumer protections functions will be folded into another agency or agencies.

2. The president's proposal to limit the size of financial institutions (the "Volcker rule") has complicated the process and may have come too late in the game.

Our contacts on the Hill are telling us to expect committee action on a financial reform package by the end of the month. Regardless of the final outcome of the Dodd-Shelby discussions, the Chairman appears committed to moving ahead.

The "Volcker Rule" debate has created new complications and new energy behind industry lobbying. It has not been uncommon in recent weeks to see the CEO's of major banks visiting key Senators -- not just their lobbyists.

Ex-Fed Chair Paul Volcker himself testified this past Tuesday about the need for heading off the "too big to fail" phenomenon. Volcker asserted that the federal government – through its role as bank deposit insurer – is ultimately providing taxpayer protections for the speculative activities of commercial banks, or those activities that go beyond a bank’s “essential function in the economy.” The second part of the president’s proposal would limit over-leveraging among large financial institutions by placing caps on the market share of an institution’s liabilities, a move that Volcker says will supplement proposed regulations to enhance capitalization requirements and help eliminate “too-big-to-fail” institutions.

Although Dodd is a strong supporter of the Volcker rule, he and Shelby have been united in criticizing the proposal’s timing, raising serious doubts as to whether its inclusion into the broader financial reform legislation is possible considering the shortened timelines for debate.

Stay tuned -- by the time Washington digs out from the next snowstorm there should be further news.

It's Complicated

Blank Rome Government Relations — Fri, 29 Jan 2010 16:23:44 -0500

That is the recent refrain of Senate Banking Committee Republicans when asked about the financial services regulatory reform bill now pending in the Senate.

While Republicans have expressed continued willingness to work with committee Democrats to develop bipartisan legislation that would address the root causes of the recent financial crisis, they appear in no hurry to pass a bill—and certainly not what they consider a “bad bill”—just for the sake of having a bill.

As a whole, Senate Banking Committee Republicans think the Dodd bill and the House-passed reform bill go too far. Chairman Chris Dodd (D-CT) seems well aware of that fact and, as reported previously, has constituted numerous working groups to hammer out the various issues. Those groups are currently working together to resolve outstanding issues, with varying degrees of progress.

While the committee has been expected to mark-up its version of the financial reform bill in February, that schedule will depend upon the level of progress and bipartisanship the committee is able to achieve. One major stumbling block has been the establishment of a new Consumer Financial Protection Agency (CFPA)—a signature issue of the Obama Administration. Chairman Dodd has reportedly expressed a willingness to move away from the CFPA in a favor of giving more consumer protection authority to existing prudential regulators—a position also favored by committee Republicans.

The buzz is that the White House will continue to insist on including the CFPA in any financial regulatory reform package. However, the new math of the Senate allows for Republicans to block initiatives where the party is uniformly opposed, which appears to be the case with the CFPA.

So the question may become, "Do Democrats want a bill or do they want a fight?" While Dodd appears to want a bill—and another legislative feather in his cap before retiring at the end of the 111th Congress—the Obama Administration, by many accounts, may prefer to have a fight. Many jumped to this conclusion last week when the administration announced plans to limit the size and investment activities of commercial banks and bank holding companies, representing a significant departure from their original policy stance of mitigating banking risk through higher capital standards.

A battle would be okay by Republicans too, since they would see that as an opportunity to block passage of an unreasonable bill and push the debate into the 112th Congress when they are likely to have better numbers and could have more influence over the legislation.

With that backdrop, Democrats and Republicans on the Senate Banking Committee are currently working to develop a financial regulatory reform package that can garner the support of most of its members. The outcome of those negotiations—and the level of bipartisan support—will determine how soon the legislation will be marked-up in committee, and when (or even whether) the bill will be considered by the full Senate later this spring.

There are a lot of moving parts—both politically and substantively. As noted earlier, “It's complicated.”

Dodd Retiring

Blank Rome Government Relations — Thu, 07 Jan 2010 12:10:05 -0500

Sen. Banking Committee Chairman Chris Dodd's (D-CT) announcement that he will not seek re-election has roiled the already choppy waters surrounding the financial reform legislation. The Financial Reform Watch team has been intrigued by the comments attibuted to congressional and industry sources indicating that his retirement may increase the opportunity for a bipartisan bill. We are not so sure.

While we would all like to think that respect for a departing colleague and the desire of Senators to help him cement his legacy would result in more cooperation, there is little evidence to suggest today's Senate operates on that principle. We need only look back as far as the consideration of health care reform to support our view. Early in 2009, many thought the illness of Sen. Ted Kennedy would spur Senators to help him achieve his goal of more than 30 years to achieve health care reform. After his death, there was even more talk of how Senators might be moved to seek accommodation in his memory. Clearly, those sentiments—if they ever existed—were overwhelmed by the deep partisan divide in the Senate.

Today, those who indicate that bipartisanship might emerge in the wake of Dodd's announcement seem to believe he will be more accommodating of GOP concerns over certain issues—particularly the creation of the Consumer Financial Protection Agency. Our contacts on the Hill suggest that creation of that agency is as close to non-negotiable for the Administration and Sen. Dodd, not to mention House leaders, as any issue in the package. If the price of GOP support for the bill is dropping that, we are doubtful we will see much bipartisanship.

So our assessment is that is is too early to say whether Dodd's retirement improves or diminishes chances for a bill to be enacted. Your FRW team will be monitoring the situation closely and will keep you apprised of developments.

House Passes Financial Reform

Blank Rome Government Relations — Fri, 11 Dec 2009 15:31:42 -0500

This afternoon the House of Representatives took a significant step towards the enactment of comprehensive financial reform legislation, passing the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) by a vote of 223 to 202. Democrats would have preferred a larger margin of victory, but they can take some satisfaction from having now passed three of the Obama Administration's major priorities—climate change, health care, and financial reform.

Throughout the week, the Democratic leadership was forced to fend off several attempts by moderate Democrats to narrow the bill’s provisions, especially those relating to the Consumer Financial Protection Agency (CFPA). On Wednesday, word quickly spread around the Capitol that a federal preemption amendment backed by Rep. Melissa Bean and her allies in the New Democrat Coalition faced strong opposition from the White House and Treasury, who were seeking to bar it from consideration on the House floor. The Bean amendment would have broadened the CFPA’s ability to preempt state consumer protection laws. However, following direct negotiations between the New Dems and top Treasury officials, a modified version of Bean’s preemption amendment was ultimately wrapped into a manager’s amendment that passed on Thursday.

Another significant amendment, opposed by House leadership and the White House, was offered by Rep. Walt Minnick (D-ID). Minnick's amendment would have replaced the Consumer Financial Protection Agency (CFPA) with a Consumer Financial Protection Council (CFPC), comprised of 12 members, including, among others, the Secretary of Treasury, the Chairman of the Federal Reserve and the chairman of the CFTC and SEC. Although rejected by a vote of 208-223, Minnick was able to pick off 33 Democrats, potentially providing momentum for a CFPA alternative in the Senate where the Banking committee is still working on a bipartisan compromise.

The defeat of the "cramdown" amendment offered by Rep. John Conyers (D-MI) was a victory for the banking industry. Conyers' amendment would have enabled bankruptcy courts to modify mortgage repayment periods, reduce interest rates and fees, and lower the mortgage principal balance to the level of a home’s fair market value. Although the House passed similar language as part of the Helping Families Save Their Homes Act of 2009 (H.R. 1106) in March, the amendment was rejected today by a vote of 188-241.

Now that Financial Services Committee Chairman Barney Frank (D-MA) got his comprehensive reform package passed before the holidays, the pressure is on Senate Banking Committee Chairman Chris Dodd (D-CT) to produce results on his side of the Capitol.

TARP Lives to See the New Year...Now What?

Blank Rome Government Relations — Wed, 09 Dec 2009 15:03:41 -0500

Treasury Secretary Timothy Geithner notified Congress today that the $700 billion Troubled Asset Relief Program (TARP) would be extended until October 3, 2010 – a move that, although expected, adds fuel to an ongoing debate on Capitol Hill whether to wind down the politically unpopular program or utilize its excess funds for broader economic recovery efforts.

In a letter sent to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, Geithner sought to quell political concerns by outlining a TARP “exit strategy” and narrowing the program’s focus to three specific areas in 2010: home foreclosure mitigation; small-business lending; and the Term Asset-Backed Securities Loan Facility (TALF) in order to facilitate lending through securitization markets. According to Geithner, no TARP funds will be spent beyond these specific areas “unless necessary to respond to an immediate and substantial threat to the economy.” In addition, the Capital Purchase Program – aimed at boosting bank lending through nearly $250 billion in direct capital injections – will cease.

Key to the administration’s TARP extension is the assumption that only $550 billion of the $700 billion program will be necessary for deployment, a figure buoyed by Treasury estimates that TARP-recipient banks could repay as much as $175 billion by the end of 2010. Sanguine figures such as these have opened the floodgates to recent congressional proposals that would use TARP proceeds to create or expand economic recovery initiatives -- including a job-creation proposal outlined yesterday by President Obama – and, at the same time, remain budget-neutral.

Despite legal restrictions that will likely hamper the administration’s ability to tap TARP funds directly for programs that are indirectly tied to the financial market crisis, several lawmakers have offered amendments to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) – slated for House floor consideration later today – to divert TARP funding, including:

Reps. Frank (D-MA) and Waters (D-CA) – Amendment reallocates $4 billion in TARP funds for mortgage relief efforts, including $3 billion to the Department of Housing and Urban Development (HUD) to issue low-interest loans to unemployed homeowners; and $1 billion for state and local governments to purchase foreclosed or abandoned properties.
Rep. Crowley (D-NY) – Amendment reallocates TARP funds to increase by $20 billion the authorized amounts of loans guaranteed by the Small Business Administration’s 7a loan program in FY2010 and FY2011.
Rep. Matsui (D-CA) – Amendment reallocates TARP funds to the President’s Making Home Affordable program.

The TARP debate in Washington will only heat up in the days ahead. Stay tuned for additional updates.

Financial Reform Package Nearly Primed for House Floor Debate...

Blank Rome Government Relations — Tue, 08 Dec 2009 14:28:32 -0500

…But first, the House Rules Committee will meet this afternoon and Wednesday to consider nearly 250 amendments that have been filed to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), initiating a process that will set the parameters for a series of votes to occur during three days of floor consideration that could begin later this week.

Reflecting increasing pressure from Capitol Hill for the Obama administration to ramp up existing mortgage foreclosure prevention efforts, Rep. John Conyers (D-MI) and Zoe Lofgren (D-CA) have offered an amendment to H.R. 4173 that reincarnates a highly controversial provision—known as “cramdown”—which would allow bankruptcy judges to modify the terms of troubled mortgages.

Identical to the language passed by the House in March under the Helping Families Save Their Homes Act of 2009 (H.R. 1106), the Conyers-Lofgren amendment would authorize bankruptcy courts to modify mortgage repayment periods, interest rates and fees, and even the principal balance if a borrower provides evidence that efforts to complete a loan modification through the Obama administration’s “Making Homes Affordable” program have failed. Despite passage in the House, the cramdown legislation has twice been voted down in the Senate during separate votes in 2008 and 2009.

Below is a list of other key amendments that the House Rules Committee will consider this week:

Rep. Spencer Bachus (R-AL)—Republican substitute amendment that includes a new chapter of the bankruptcy code to wind-down certain non-bank financial institutions; the creation of a consumer protection council comprised of existing Federal regulators; the removal of statutory reliance on credit rating agencies; and reform of Fannie Mae and Freddie Mac.
Rep. Walt Minnick (D-ID)—Amendment that replaces the Consumer Financial Protection Agency (CFPA) with a Consumer Financial Protection Council (CFPC), comprised of 12 members, including, among others, the Secretary of Treasury, the Chairman of the Federal Reserve and the chairman of the CFTC and SEC.
Rep. Kanjorski (D-PA)—Amendment that eliminates exemptions from requirements under the Sarbanes-Oxley Act regarding external audit of internal controls that have been provided to public companies with less than $75 million in market capitalization.
Rep. Maurice Hinchey (D-NY)—Amendment that prohibits a financial institution from engaging in both commercial and investment banking through the reinstating of the Glass Steagall Act.
Reps. Frank (D-MA) and Peterson (D-MN)—Amendment that imposes position limits for physical commodities and addresses agency jurisdictional issues regarding swap trading by providing the CFTC with jurisdiction over swaps and the SEC with jurisdiction over swaps primarily based on securities.

FRW will continue to provide updates in the hours and days ahead as the House readies H.R. 4173 for the floor.

Divide, Conquer, and Reassemble

Blank Rome Government Relations — Thu, 03 Dec 2009 10:04:12 -0500

The House Financial Services Committee yesterday completed work on the last pieces of its financial reform package, approving the systemic risk bill (H.R. 3996) and the Federal Insurance Office Act (H.R. 2609). Next Tuesday, December 8th, the House Rules Committee will reassemble into one large package all of the bills the Financial Services Committee considered separately. That package will include the two bills approved yesterday as well as legislation covering the Consumer Financial Protection Agency (H.R. 3795), over the counter derivatives (H.R. 3126), executive compensation and corporate governance (H.R. 3269), and mortgage reform and lending standards (H.R. 1728).

Financial Services Chairman Barney Frank (D-MA) is angling to have the omnibus reform package on the House floor on December 9th with at least three days of debate before the final vote. FR Watch is hearing from others on the committee that the date may slip to the following week. Frank said he anticipates the Rules Committee will approve ten additional, substantive amendments for consideration by the full House.

As the House is putting its package back together, the Senate Banking Committee is peeling apart the (Chairman Chris) Dodd draft so that bipartisan pairs of Senators can delve more deeply into assigned issue areas. Chairman Dodd (D-CT) and Ranking Member Shelby (R-AL) are focusing on the Consumer Financial Protection Agency. Senators Reed (D-RI) and Gregg (R-NH) are examining derivatives and credit rating provisions. Senators Schumer (D-NY) and Crapo (R-ID) are taking on corporate governance, investor liability, and executive compensation. Senators Warner (D-VA) and Corker (R-TN) are covering issues related to systemic risk.

The Senate Banking Committee has not yet scheduled any (financial reform-related) hearings beyond today’s nomination hearing for Fed Chairman Ben Bernanke, but it is safe to assume that the committee will be fixated on financial reform for the rest of December and probably well into the new year.

The Dodd Plan - A Large Stake in the Ground

Blank Rome Government Relations — Tue, 10 Nov 2009 11:31:22 -0500

Senate Banking Committee Chairman Chris Dodd (D-CT) today is releasing its comprehensive draft legislation to reform the financial sector. The Restoring American Financial Security Act of 2009 represents a bold and sweeping approach to financial industry reform. The headline emerging from the 1100+ pages will most likely be the creation of a single federal bank regulator. Significant powers would be transferred from the Federal Reserve, the FDIC and the Treasury to a new Financial Institutions Regulatory Administration. The bill would also create a new Agency for Financial Stability to review "too big to fail" issues, a new National Insurance Office, and the Consumer Financial Protection Agency proposed by the Obama Administration. Executive compensation provisions are in the bill with a focus on shareholder votes on certain types of packages, clawbacks and other restrictions.

Full Text of Bill (PDF)
Summary of Bill (PDF)

Chairman Dodd is staking out a big piece of turf in the legislative battle ahead. Liberated from the need to compromise with committee Republicans and spurred-on by his own re-election worries he is proposing to shake-up financial regulation in the United States in the most aggressive way we have seen to date. No one is a more sophisticated inside player in the Senate than Sen. Dodd. In taking this approach he is advancing two goals—he has put a lot on the table and left himself room to take things off to get the bill passed and he has also taken a stance that will help him fight those in Connecticut who have been saying he is to cozy with the financial sector.

We will have updates in the hours and days ahead about the reaction to this proposal. Watch this space.

Revealing it All?

Blank Rome Government Relations — Fri, 06 Nov 2009 15:20:28 -0500

On home improvement shows, it’s called the big “reveal.” In Washington, the “reveal” is expected on Monday in the Senate Banking Committee with the much anticipated release of Chairman Chris Dodd’s (D-CT) omnibus financial reform bill. Rumors of its content have been leaking out for several days. Also being revealed --although it has been hinted at for weeks-- is the partisan divide that has opened up on Chairman Dodd's committee.

One of the most controversial elements expected to be in Dodd’s plan is the removal of bank supervisor authorities from the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, and the Office of Thrift Supervision in order to consolidate those authorities into one new super bank regulator. Neither the administration proposal nor House Financial Services Committee measures contemplated this approach. In fact, Financial Services Committee Chairman Barney Frank (D-MA) has criticized the concept because it does not “respect and preserve the dual banking system;” it undercuts the role of state bank supervisors; and it fails to preserve the role of the FDIC, an agency that Frank thinks is performing well.

Other expected provisions are a “Council of Regulators” approach to systemic risk; a Consumer Financial Protection Agency that will have oversight over most financial service products except for insurance or securities; credit rating agency reform; resolution authority for large financial institutions; and regulation of derivatives. Dodd plans to hold one or more hearings on his bill the week of November 16th and expects the committee to markup the bill after Thanksgiving.

Dodd has decided to move ahead without the support and assistance of Ranking Member Shelby (R-AL) and the other committee Republicans. Some are viewing this as a setback given that Dodd and Shelby had made a show in the past year of their shared views on some key parts of the financial reform agenda. Over the past six-to-eight weeks, as Dodd has pushed to pull the package together, it became clear the GOP side of the committee was reticent to come along. While this prevents the bipartisan approach Dodd had wanted, it does free him to take the bold approach it now appears we will see. Given the importance to his re-election of appearing to shake-up the financial establishment, Dodd may benefit from the freedom to stake out this turf. Whether that will contribute to the ultimate enactment of legislation remains to be seen.

Watch this space early in the week for a discussion of the outlook on the House side for continuation of the progress in assembling a comprehensive financial reform package.

Clash of the Chairmen

Blank Rome Government Relations — Fri, 30 Oct 2009 14:21:53 -0500

Gaining strong momentum after its passage out of the House Financial Services Committee last week, a bill crafted by Chairman Barney Frank (D-MA) to create a new Consumer Financial Protection Agency (CFPA) ran into a significant and unforeseen roadblock on Thursday – fellow Democrat and equally powerful House Energy and Commerce Chairman Henry Waxman (CA). In what could have been a routine markup of H.R. 3126, the Consumer Financial Protection Agency Act of 2009, the House Energy and Commerce Committee -- whose jurisdiction includes consumer protection and Federal Trade Commission oversight -- made dramatic changes to Frank's bill. One of the most obvious can be gathered from the amended bill's title: the Consumer Financial Protection Commission Act of 2009.

Waxman and the committee's Ranking Member Joe Barton (R-TX) collaborated on the manager’s amendment that would dramatically shift the agency’s governance from a single director to a commission led by a five-person bipartisan panel. Modeled after independent agencies like the Federal Communications Commission and the Federal Trade Commission, the chairman and commissioners would be nominated by the president, confirmed by the Senate, and serve staggered five year terms

Frank expressed sharp disapproval of the Waxman approach, referring to the commission model as “a big mistake” that will “weaken the capacity of the agency to provide consumer protection.” Frank defended the House Financial Services version as a balanced approach that allows a CFPA director to take prompt action, while at the same time, receiving the necessary recommendations and oversight from a board comprised of bank regulators and consumer groups. The differences may need to be resolved on the House floor. Waxman indicated he would have further changes during the floor debate, specifically removing some of the industry exemptions that were carved out by the House Financial Services legislation, including those for merchants, retailers and auto dealers.

The House Rules Committee will be the next stop for the bills where Chairman Louise Slaughter (D-NY) will execute the will of the House Democratic leadership and likely resolve the differences. It would not be in the best interest of the White House or congressional Democrats to have two of its most powerful chairmen battle over consumer protection on the House floor. The schedule is not yet posted, but the Rules Committee reconciliation could occur as early as next week.

Preemption in Consumer Financial Protection Agency (CFPA) Bill--More to Come

Blank Rome Government Relations — Thu, 22 Oct 2009 14:54:33 -0500

Heading into the House Financial Services Committee's markup of the CFPA bill last week, a handful of moderate, pro-business Democrats—including Reps. Melissa Bean (IL) and Jim Himes (CT)—banded together with the intention of significantly watering down bill language that scraps long-standing federal preemption laws related to consumer protection. However, merely a week later, and in the midst of suggestions from Democratic colleagues that a reinstitution of federal preemption laws would hamper the rulemaking ability of the states and ultimately poison the overarching bill, Bean and her allies were only able to muster a few drops as the committee approved legislation this morning by a vote of 39-29.

Instead, by voice vote, the committee agreed yesterday to an amendment to the Consumer Financial Protection Agency Act of 2009 (H.R. 3126) that allows the Office of the Comptroller of the Currency (OCC) or the Office of Thrift Supervision to intervene and preempt state laws on a limited basis, only in cases where state law discriminates against nationally chartered institutions or “significantly interferes with” national banks’ ability to engage in banking. Offered by Reps. Mel Watt (D-NC) and Dennis Moore (D-KS), the amendment still leaves in place bill language that severely limits the exemptions from state laws that nationally chartered thrifts, banks, and their operating subsidiaries have enjoyed since 2004.

For the past several weeks, Bean had been championing an opposing amendment that would have preserved federal preemption for nationally chartered financial institutions. However, pressure from the White House and progressive members of the Democratic Caucus convinced Bean and her moderate “New Democrat” coalition to stand down at this juncture. Committee Chairman Barney Frank (D-MA) and others have said the preemption issue can be revisited when the bill goes to the full House for a vote. Jumping at the opportunity to expose fissures amongst Democrats on the committee, Rep. Jeb Hensarling (R-TX) introduced a nearly identical amendment to Bean’s, but was defeated by a vote of 29 to 38. Since Bean was not present at the markup due to a family illness, she did not have to participate in the potentially awkward vote.

The large national banks lost a lot of ground during the House markup. Financial Reform Watch anticipates they will redouble their efforts in the Senate, since it is unlikely that Bean will go against the party leadership and push her preemption amendment any further. One advantage the big banks have is time. The amount of time health care reform will demand on the Senate floor and the difficulties in finding bipartisan consensus at the Senate Banking Committee are likely to cause further delay in getting a comprehensive package before the full Senate.

Timing Is Everything

Blank Rome Government Relations — Fri, 16 Oct 2009 11:45:19 -0500

While Senate Banking Committee leaders Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL) have been engaged in a public display of bipartisanship about shaping comprehensive financial services reform legislation, it appears difficulties are arising in finding common ground on key issues. What we hear on Capitol Hill is that development of a detailed legislative proposal is now taking place almost exclusively on the Democratic side. GOP involvement has been minimal in recent weeks as Sen. Dodd's team seeks to pull together a draft piece of legislation.

The earlier goal of releasing a bipartisan draft in October and having a committee markup soon thereafter is proving elusive. Committee staff continues to work on a comprehensive measure including the controversial Consumer Financial Protection Agency (CFPA) and—one way or another—we expect something to emerge from that process in the next few weeks. Key committee members believe the CFPA is the one thing on which the Administration will draw a line in the sand, so opponents of that agency should not expect any early "give" on that front from the Democratic side. The major issues on that topic will center on the scope of the agency's authority and the powers it will have.

The issue of systemic risk regulation is under active discussion at the committee and it appears unlikely the Fed will be given that role. One indicator of the Fed's unpopularity at the committee these days is that there appears to be some reticence to move quickly on re-confirmation hearings for Fed Chair Ben Bernanke. Committee leaders would like to avoid hearings that might color the committee's deliberations on financial reform legislation. So even though his term is up at the end of the year, we would not be surprised to see Bernanke's reconfirmation delayed until after the New Year. He can stay in office beyond the expiration of his term, so there is no burning need to get the process completed right on time.

Can New Dems Deliver Preemption?

Blank Rome Government Relations — Fri, 02 Oct 2009 14:21:02 -0500

Following last week’s unveiling of his newly-modified draft bill to create a Consumer Financial Protection Agency (CFPA), House Financial Services Chairman Barney Frank (D-MA) announced Wednesday his intention mark up the bill the week of October 12. While the philosophical debate between House Democrats and Republicans over the CFPA’s creation may be coming to a close, the debate amongst Democrats over the CFPA’s contours may be just beginning.

Federal preemption of state banking regulations is one of the first issues to divide Democrats. During Wednesday's committee hearing, Democratic lawmakers expressed concerns over a provision in Frank’s draft that would scrap federal preemption laws related to consumer protection. The Frank bill would have the CFPA set a minimum federal threshold and enable the states to set stricter rules if they choose. The potential exposure of nationally chartered banks to different consumer financial protection laws in every state is a prospect some fear would be overly cumbersome.

Leading the charge for federal preemption are third-term Congresswoman Melissa Bean (D-IL) who currently serves as Vice-Chair of the business friendly New Democrat Coalition and Rep. Jim Himes (D-CT), a freshman and former investment banker. Bean and Himes co-chair the New Democrats’ Financial Services Task Force and are in the process of drafting an amendment to Frank’s bill that would shield federally chartered banks from certain state consumer protection regulations. Despite their overall support for the CFPA, Bean said they want to ensure regulatory consistency through the CFPA's national standards.

Although Frank is dismissive of concerns that federal preemption is necessary to avoid market disruptions, Edward L. Yingling, President and CEO of the American Bankers Association (ABA), warned at the hearing that Frank’s current draft legislation would create a “patchwork of state, and even local, laws that will confuse consumers.” About a third of the majority side of the Financial Services Committee are New Democrats so Bean and Himes have some leverage, especially if committee Republicans side with them. Some of our FR Watch sources predict that Frank will concede on this, and a majority of the committee members will ultimately vote for the preemption amendment.

An Evolving Approach to Consumer Financial Protection

Blank Rome Government Relations — Wed, 23 Sep 2009 17:28:10 -0500

House Financial Services Chairman Barney Frank (D-MA) yesterday sent a memo to his Democratic colleagues on the committee outlining areas where he is willing to compromise on the Obama administration’s proposed Consumer Financial Protection Agency (CFPA) and inviting additional Member input. In recent weeks, the Independent Community Bankers Association, the U.S. Chamber of Commerce, and other industry organizations have vehemently opposed the CFPA on the grounds that the new agency’s authority would be too broad and it would separate regulators’ consumer protection functions from safety and soundness responsibilities.

Moderate and Blue Dog Democrats on the committee have been receptive to industry criticisms, especially those of community bankers, who have a strong presence in most members’ congressional districts. It is not surprising that Frank is beginning to compromise on one of the most controversial elements of the administration’s plan, given the Chairman’s determination to enact financial reform before the end of the year.

Chairman Frank wrote that he would unveil a discussion draft “soon” and indicated it would differ from the Treasury’s draft CFPA legislation in the following ways –

A regulatory exemption for merchants, retailers, and other non-financial businesses. For example, retailers, doctors, telecommunication companies, law firms, and other non-bank entities that bill consumers will be explicitly exempt from CFPA regulation.
Removal of the administration’s “plain vanilla” requirement and “reasonableness standard.” The CFPA will not be able to mandate that financial institutions only offer plain vanilla products and services nor will they be required to “assess whether consumers comprehend the products and services” offered. Instead, Frank’s legislation will task the CFPA with improving consumer disclosure requirements.
A dispute mechanism in the event a CFPA ruling conflicts with a ruling of an institution’s primary financial regulator. Frank’s legislation will set up a “disinterested governing panel” to hear and resolve appeals quickly.
The CFPA will also supervise non-bank financial institutions that offer consumer financial products and services in a way that is “no less burdensome or comprehensive than that governing traditional banks and thrifts.” Banks will not be assessed fees for the cost of CFPA oversight of non-banks, and the Federal Reserve will supplement the CFPA’s funding.
The CFPA will be run by a “single Director, who will be advised by a Consumer Financial Protection Oversight Board,” comprised of the Federal Reserve, Comptroller of the Currency, FDIC, Office of Thrift Supervision, National Credit Union Administration, Department of Housing and Urban Development, Federal Trade Commission, and the Chairman of the state liaison committee of the federal Financial Institutions Examination Council.
Financial literacy will be an important part of the CFPA’s mission.

Read Chairman Frank's CFPA discussion draft.

Financial Reform Marches Down Field--Fed Protects Its Turf

Blank Rome Government Relations — Fri, 18 Sep 2009 16:50:06 -0500

In the spirit of football season—when trite gridiron analogies are abundant—the Federal Reserve exhibited an aggressive defensive stand this week, asserting its regulatory authority in the face of an administration proposal to curb its independence through the creation of a Consumer Financial Protection Agency (CFPA). This, coupled with the SEC actions yesterday—moving to ban flash orders that enable certain market participants to execute trades faster than everyone else and proposing new rules to crack down on credit rating agencies—suggests that regulators are beefing up their own authority to head off anticipated reform efforts on Capitol Hill. How well the agencies address the perceived regulatory gaps may have a significant impact on a legislative reform bill and could potentially slow down its momentum.

The Fed’s first defensive play came on Tuesday when it announced new regulatory policies that will extend its oversight to certain non-bank institutions, including many of the top originators of subprime loans. As part of the consumer compliance supervision program, the Fed will immediately begin overseeing the activity of non-bank subsidiaries of bank holding companies and foreign banking organizations, specifically by enforcing existing consumer protection laws and investigating all consumer complaints leveled against such entities.

The Fed’s second play – although reportedly still a few weeks from final completion – is the drafting of a proposal that will allow the Fed to reject bank compensation structures that the regulators believe could promote risky financial incentives and practices. According to the Wall Street Journal, the forthcoming proposal would allow the central bank to review and amend not only the compensation polices for executives, but also those for mid-level employees such as traders and loan officers, likely forcing banks to utilize “clawbacks” or mechanisms to reclaim the pay of employees who engage in risky behavior. The Fed is citing its existing regulatory authority over bank safety and soundness to impose its reach into the normal workings of corporate boards and bank executives.

Although the first announcement had been long expected—Fed Governor Elizabeth Dukes had earlier testified to the House Financial Services Committee of plans for permanent oversight following a successful joint pilot project that reviewed consumer protection compliance of non-depository institutions engaged in subprime lending—the executive compensation proposal caught many in the financial industry off-guard, going far beyond the expected restrictions on only the highest bank earners.

Next week, the House of Representatives is slated to initiate the drafting process for financial reform legislation, beginning with several hearings related to a systemic risk regulator and the CFPA tentatively scheduled all the way through October. House Financial Services Chairman Barney Frank (D-MA) continues to insist that December is the new October, in reference to his original deadline for completing a reform package; and the deadline may be pushed back even further—potentially 2010—due to this week’s regulator activity.

The timing of the Fed’s moves have sent a clear message to lawmakers that it has no intention of quietly ceding its regulatory powers, especially those related to consumer protection. However, the central bank’s inability to prevent many of the missteps and misdeeds that led to the financial crisis has led to a crisis in confidence on Capitol Hill. Additionally, President Obama, Senate Banking Chairman Christopher Dodd (D-CT), House Financial Services Chairman Frank (D-MA), TARP Congressional Oversight Panel Chairman Elizabeth Warren, and FDIC Chairman Sheila Bair are all on record favoring the CFPA. Despite the strength of the offense, there is still disagreement coming from Republicans and some Democrats. Financial Reform Watch anticipates more "delay of game" setbacks in the coming months.

Below is the full list of HFSC hearings that were announced on Tuesday:

September

September 23, 9:30 a.m. Testimony from Treasury Secretary Geithner

September 24, 10 a.m. Expert’s Perspectives on Systemic Risk and Resolution Issues

September 25, 9 a.m. Oversight and Audit Issues at the Federal Reserve System

September 30, 10 a.m. Consumer Financial Protection Agency

September 30, 2 p.m. Credit Rating Agencies (Capital Markets Subcommittee Hearing)

October

October 1, 10 a.m. Financial regulators

October 2, 10 a.m. Capital Market Issues

October 6, 10 a.m. Capital Market Issues

October 7, 10 a.m. Derivatives

October 8, 10 a.m. Systemic/Prudential Banking Reform Issues

October 9, 10 a.m. Systemic/Prudential Banking Reform Issues

It's Baaaaack!

Blank Rome Government Relations — Thu, 10 Sep 2009 12:49:03 -0500

Ample debate time in Washington can bring the good with the bad. As healthcare reform continues to dominate the congressional agenda leading into the fall, lawmakers have been granted an opportunity to finely tune the legislative details of financial reform—but also a window to resurrect previously rejected ideas from the dead.

This week, House Financial Services Committee (HFSC) Chairman Barney Frank (D-MA) announced his intention to include the so-called “cramdown” legislation into his chamber's broader financial reform package, injecting new life into a divisive proposal that would allow bankruptcy judges to modify mortgages by extending the term, reducing the interest rate, or writing down the principal amount.

During a HFSC subcommittee hearing yesterday to assess the progress of the Making Home Affordable (MHA) Program, Chairman Frank joined a chorus of lawmakers in expressing disappointment that the Obama administration’s loan modification program has not assisted more distressed homeowners. According to Treasury data, MHA has only modified the loans of 12 percent of eligible delinquent borrowers. Figures from some of the large banks are even lower, with Wells Fargo reporting 11 percent of eligible borrowers and Bank of America coming in at 7 percent. Despite the low percentages, the administration is citing statistics that the program has helped reduce the monthly payments of 350,000 homeowners since March.

Facing stark opposition from the financial industry, the cramdown proposal has now been rejected twice by the Senate—most recently last spring when the Senate voted down an amendment offered by Sen. Richard Durbin (D-IL) by a 51-45 vote. The prospects for passage do not yet appear any better the third time around, but Frank's renewed push could change the momentum. While the Obama administration has not explicitly endorsed cramdown, the administration is not opposed either. When pressed by Democratic lawmakers at yesterday’s House hearing, Treasury Assistant Secretary for Financial Institutions Michael Barr and the Department of Housing and Urban Development’s Assistant Secretary for Housing David Stevens stated that retrospective cramdown legislation would not have a negative effect on the MHA program. Influential Senate Republicans on the banking committee do not expect cramdown to make a comeback. If cramdown is rejuvenated in the Senate, it will likely be due to a change of heart by some of the following ten Senate Democrats who voted against it last spring:

Bennet (CO),Byrd (WV), Carper (DE),Dorgan (ND), Johnson (SD), Landrieu (LA), Lincoln (AR), Nelson (NE),Pryor (AR),Specter (PA)

The Circus Comes Back to Town

Blank Rome Government Relations — Wed, 02 Sep 2009 17:37:15 -0500

After a summer of raucous town hall meetings, the dip in President Obama's poll numbers, and the death of Senator Ted Kennedy, members of the House and Senate may well be relieved to return to the routine of the Washington legislative process. With all the turmoil already seen and now expected, there is a flavor of the circus being back in town.

We're actually picturing a three-ring circus— the "main ring" in the middle is where the health care debate is playing out. In the smaller rings we have climate change and financial reform. The action will shift back and forth at various times but all three rings will have their moments of action. While the ultimate fate of climate change legislation is very much in doubt, health care reform and financial reform are better bets to see final or near-final action in the next four months.

On the Senate side, one Senator seeks to be ringmaster over two of the rings. Sen. Chris Dodd (D-CT) has been filling in for Sen. Ted Kennedy as the shepherd of health reform legislation at the Senate Committee on Health, Education, Labor and Pensions (HELP). With Kennedy's passing, Dodd is now the senior Democrat on the committee and could claim the Chairmanship. However, we are hearing that his preference will be to gain agreement from committee Democrats that he can continue to be the lead negotiator on health care while next-in-line Sen. Tom Harkin (D-IA) takes the chair. That way, Dodd can retain his Chairmanship of the Senate Banking Committee and also lead his colleagues through the financial reform discussion. The Senate being the collegial body that it is, it seems to us that something can be worked out along these lines.

Sen. Dodd's staff has been working with their counterparts from Sen. Richard Shelby's (R-AL) staff to look for agreement on the outlines of a comprehensive bill for financial reform. They report progress along those lines and hope to have an outline for committee members to review in the next couple of weeks. The hope is that a committee markup could occur in October. The package being discussed is comprehensive and will touch on most of the issues raised in the Obama Administration's paper from earlier this year. However, many of the specifics will be much different than those discussed by the administration. In particular, it is clear from public statements by Sens. Dodd and Shelby and from what we pick up on the Hill that the concept of the Federal Reserve as systemic risk regulator has virtually no support at the Senate Banking Committee.

We will discuss the prospects for action on the House side in a future posting.

TALF Extended

Blank Rome Government Relations — Mon, 17 Aug 2009 11:42:59 -0500

Not surprisingly, the Federal Reserve announced today that it is extending the TALF program from the December 31, 2009 deadline to March 31, 2010 for newly issued ABS and legacy CMBS and to June 30, 2010 for newly issued CMBS. While the Fed acknowledges that conditions in the financial markets have improved, it still views the markets for asset backed securities and commercial mortgage backed securities as "impaired." The Fed is also leaving the door open to further extensions should conditions warrant. Another outstanding issue is whether to expand the TALF to include other types of eligible collateral. The Fed said in its announcement that it and Treasury will reconsider the issue "if financial or economic developments indicate that providing TALF financing for investors' acquisitions of additional types of securities is warranted."

Federal Reserve Press Release, August 17, 2009

Will Cooler Days Bring Cooler Heads?

Blank Rome Government Relations — Tue, 04 Aug 2009 18:45:05 -0500

Even Cabinet Members (maybe ESPECIALLY Cabinet Members) need an August break. Various media outlets have reported that Treasury Secretary Geithner delivered an expletive-laced tirade to the principal U.S. financial regulators during a meeting last Friday, in what sources say was a clear show of frustration over the internal opposition to some key elements of the Obama administration's financial regulatory proposal.

Fortunately, for inquisitive lawmakers, several of the meeting attendees were on Capitol Hill today to testify before the Senate Banking Committee on “Strengthening and Streamlining Prudential Bank Supervision,” including Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair, Federal Reserve Governor Daniel Tarullo, Acting Director of the Office of Thrift Supervision (OTS) John Bowman and Comptroller of the Currency John Dugan.

Confirming the veracity of the reports, the regulators were also unwilling to soften their criticism, as Bair and her fellow regulators expressed sharp resistance to the administration's proposal to consolidate the bank supervisory functions of the OTS and the OCC into a new National Banking Supervisor -- citing concerns that unified regulation would undercut the interests of community banks and would do little to close the most glaring regulatory gaps that occurred in the non-bank, or "shadow," banking system.

After hearing from the witnesses, Senate Banking Committee Chairman Chris Dodd (D-CT) openly speculated about the administration's plan, commenting that it is “…a thoughtful proposal but I wonder if it is the right prescription.” Then again, Dodd’s comments may offer more insight on where his mind has focused these past several weeks than about the financial reform outlook.

The House adjourned last Friday and the Senate will adjourn this Friday for the August recess. Dodd is going home to face some challenging poll numbers as he gears up his 2010 re-election campaign. The opinion landscape is shifting rapidly, and legislators may come back in September with some different notions than they left with in August. One thing is for certain, it is going to be a very busy fall.