Government Executive - Authors - Bill Swindell

SEC stretched thin by new rules

Bill Swindell — Tue, 19 Oct 2010 00:00:00 -0400

Securities and Exchange Chairman Mary Schapiro said Tuesday the cost of implementing scores of rules under the Dodd-Frank overhaul of financial regulation has forced her to shift money and people from other pressing tasks.

In an address to the National Association of Corporate Directors, Schapiro said that her agency has to issue 105 rules, conduct more than 20 studies and create five new offices. Those mandates, she said, have stretched the commission's $1.1 billion budget. The Obama administration has proposed a 12 percent increase for fiscal 2011, but Congress hasn't yet approved it.

"We will be shifting resources from other areas that I think are equally deserving of our time and attention right now," Shapiro warned. Though she insisted the SEC would meet all its deadlines under the new law, she said the agency had "been stretched too thin over time" and was "really resource constrained."

Schapiro's remarks echoed complaints by Bart Chilton, a member of the Commodity Futures Trading Commission, who has said his agency hasn't been given enough money to carry out its duties under Dodd-Frank. The CFTC had requested an additional $92.2 million beyond its $168.8 million budget, and it received no boost in the recent continuing resolution that kept agencies running until the lame-duck session can consider full-year funds.

The funding issue is emerging as a key obstacle as the two agencies press ahead to issue their rules amid heavy lobbying by the financial sector. It also comes as Republicans have a shot of taking over both chambers in the next Congress and are vowing to slash domestic spending. While the two agencies are not considered likely to have their budgets reduced, they may not get as much as Obama has requested if Republicans take control.

The SEC failed in Dodd-Frank negotiations to be given self-funding powers through the fees it collects, which this year are expected to total $1.5 billion. Appropriators protested they would not be able to have sufficient oversight. But the agency was allowed under the new law to tap up to $100 million annually from a reserve fund.

Schapiro noted that her agency must start from scratch on two rules where it has not had a significant presence: oversight of over-the-counter derivatives and new registration requirements for hedge funds. Both are expected to require significant money and manpower.

"We're going to create a regulatory regime where none currently exists," Schapiro said of the hedge fund rulemaking.

On Monday, the commission proposed final rules to implement provisions in the new law that require corporations to give shareholders an advisory vote on their executive-pay plans at least once every three years. The SEC rule also would also allow a non-binding vote on golden parachute packages.

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Some names to lead Consumer Bureau start to circulate

Bill Swindell — Thu, 15 Jul 2010 00:00:00 -0400

The Obama administration will have numerous tasks to ramp up once the Senate clears a conference report on the financial services overhaul, which could come as early as Thursday.

At the top of the list is who to appoint as director of a new Bureau of Consumer Financial Protection, the watchdog against unfair and abusive home mortgages, credit cards and other credit products.

The frontrunner appears to be Elizabeth Warren, the Harvard University law professor who first broached the idea of such an agency in a journal article for Democracy three years ago. She has been the leading advocate for the agency throughout the debate on the legislation.

"My first choice is Elizabeth Warren," House Financial Services Committee Chairman Rep. Barney Frank, D-Mass., said Wednesday. "She is a brilliant advocate. She is sensible. She has a good sense how to operate. She is not some windmill-tilting ideologue." Senate Majority Leader Harry Reid, D-Nev., appointed her in 2008 to lead the Congressional Oversight Panel monitoring the Troubled Asset Relief Program.

Warren's selection, though, would likely trigger opposition from the banking community, which privately grumbles she doesn't understand the industry, and GOP senators. While not referring to Warren, Sen. Judd Gregg, R-N.H., has voiced fears the agency will be led by those with a social justice mission, rather than one promoting stability in the banking system.

"She will be controversial to get through the Senate," said Ed Mierzwinski, consumer program director for U.S. PIRG. But she also would be his first pick. "Any nominee for this agency, the industry will try to slow down the vote, slow walk the nominee no matter how perfect their resume."

Another possibility is Michael Barr, assistant Treasury secretary for financial institutions. Barr was one of three primary administration negotiators during the overhaul talks, and is an expert in behavioral economics.

"Michael has been the policy and political architect, so he deserves credit for that," Mierzwinski said. Other possibilities include Eric Stein, deputy Treasury secretary for consumer protection and Allen Fishbein, a consumer affairs adviser at the Federal Reserve, where the bureau will be housed.

The bureau will have authority to define the businesses under its supervision, determine if it should limit the use of mandatory predispute arbitration, and determine what is considered an abusive act that would be prohibited.

"It's starting with almost a blank slate. The first people working there will have a disproportionate effect because they will establish precedent that will drive how the agency acts many years in the future," said Douglas Elliott, an analyst at the Brookings Institution.

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Senator stands firm on consumer protection bureau

Bill Swindell — Fri, 30 Apr 2010 00:00:00 -0400

Dodd gave a full-throated defense of the bureau against attacks by its leading opponent, the U.S. Chamber of Commerce, which has charged the provision would hurt firms outside the financial industry such as orthodontists and bakery owners.

"It saddens me that an organization like that would put out a piece of paper with as much false information about it," Dodd said in a floor speech.

Dodd read from the bill's language that states the bureau "may not exercise any rulemaking, supervisory, enforcement or other authority under this title with respect to a merchant, retailer or seller of nonfinancial goods or services that is not engaged significantly in offering or providing consumer financial products or services."

Added Dodd: "I don't know what part of the sentence they don't understand."

Sen. Bob Corker, R-Tenn., on the floor asked Dodd to consider making changes to the bureau that could result in an "overwhelming vote."

Republicans are pushing for changes that would prohibit state consumer laws from exceeding those of federal standards and ban state attorneys general from being able to file civil suits for enforcement actions. Both ideas are opposed by consumer activists.

"I realize that a bill can pass out of this body on a 62-vote margin," Corker said. "I would hope what we would do is figure out a way to have an 85-vote bill and come together on this one issue."

In response, Dodd defended his work across the aisle during his congressional career and said he is reaching out to lawmakers.

"I am prepared to listen to ideas on how we make this work better. But I don't want someone to exaggerate what this means and suggest the whole bill should fall because we are trying to do a little more here in this area of protecting people who have very little protections out there."

The chamber will not vote on amendments until Tuesday, when it considers a measure by Sen. Barbara Boxer, D-Calif., that would further clarify that no taxpayer funds would be used to liquidate a "too-big-to-fail" firm that has been taken over by regulators.

Senate leaders have tightly controlled the debate so far, with no other senators being able to call up their amendments. The chamber could move next week to take up more contentious amendments, such as one by Sen. Bernie Sanders, I-Vt., that would require an extensive Government Accountability Office audit of the Federal Reserve, and another, by Sen. Jim Webb, D-Va., that would impose a new bonus excise tax.

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Treasury chief: Federal role in housing agencies will change

Bill Swindell — Tue, 23 Mar 2010 00:00:00 -0400

Treasury Secretary Timothy Geithner testified on Tuesday that the federal government would play a different, though still important, role in the nation's housing finance system as Congress begins to revamp Fannie Mae and Freddie Mac. But Republicans protested his failure to offer any details on how to unwind the two mortgage giants, which are under federal conservatorship.

Geithner told the House Financial Services Committee that the two government-sponsored enterprises could not continue their existing hybrid structure. The federal government took over the companies in 2008 and has committed to purchasing more than $125 billion in preferred stock.

"Government has a key role to play in that new system, but its role, and the role of the GSEs in particular, will be fundamentally different from the role played in the past," he said. "Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained."

Geithner spelled out the Obama administration's objectives, such as keeping mortgage credit widely available, making housing affordable, providing consumer protection and bringing financial stability.

But he also said any transition to the private market will have to be carefully calibrated because the two GSEs financed or guaranteed 70 percent of single-family mortgages in 2009, up from 40 percent in 2006.

"As we move forward, it is critical we facilitate a smooth transition to any new system. And I want to be clear: Treasury remains committed to supporting the continued activities of the GSEs in conservatorship," Geithner said.

Treasury has asked all stakeholders for their input by April 15.

Republicans said Geithner should have a clear plan by now, and they expressed anger that the administration decided to raise the cap on government aid to an unlimited amount while declining to put Fannie and Freddie's debt on the government's balance sheet.

"It's unacceptable that more than 18 months after the GSEs were placed in conservatorship, that the Treasury Department still does not have a plan for Fannie and Freddie," said House Financial Services ranking member Spencer Bachus, R-Ala. "Without reform, the bailouts will not stop; the housing market will not find its footing, and the American economy will not recover."

House Republicans are preparing legislation that would wind down the two companies' operations over four years; reduce their portfolio holdings by 25 percent annually; and phase out conforming loan limits that can reach almost $730,000 in some high-cost areas.

House Financial Services Chairman Barney Frank, D-Mass., said that his panel would be working on two tracks: unwinding both Fannie and Freddie while overhauling the entire housing finance system, including Ginnie Mae and the Federal Home Loan Bank System.

Frank also signaled he would push to get more assistance for rental housing, a top legislative priority for him.

"It will not be government-mandated, but there will be some role for government agencies figuring out the interaction of all these," said Frank. "Who provides liquidity to the secondary mortgage market? Is there a role for subsidy?"

Frank added he believed government should not heavily subsidize homeownership but focus instead on subsidizing rental housing. "When you put people into decent rental housing, you do not confront the problems we have seen putting people inappropriately into homeownership," he said.

Lobbying groups have put forth their own widely varying ideas. For example, the Mortgage Bankers Association has proposed a new line of mortgage-backed securities that would contain a federal guarantee, supported by a fund with fees coming from assessments on the underlying packages. Mark Calabria of the Cato Institute called for breaking the two mortgage giants into at least a dozen pieces. The National Association of Realtors has proposed a government-chartered structure, such as the Export-Import Bank, that would be politically independent and free of congressional appropriations.

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Lawmaker pitches Consumer Financial Protection Agency counteroffer

Bill Swindell — Mon, 01 Mar 2010 00:00:00 -0500

Senate Banking Committee ranking member Richard Shelby, R-Ala., has made a counteroffer to a proposed Consumer Financial Protection Agency, calling for a new consumer protection division within the FDIC and with rules subject to approval by the agency's board.

The Shelby proposal would create a presidentially appointed director with a five-year term, with the authority to write consumer protection rules. It also would have supervision over all state-regulated depository institutions and some large state-chartered nondepository mortgage issuers. But the director would have to report to the FDIC chairman, and all rules would have to be approved by the FDIC board, which has the Comptroller of the Currency and the head of the Office of Thrift Supervision as two of its five members.

"This is a good-faith proposal, and we take it seriously," said Travis Plunkett, legislative director for the Consumer Federation of America. But he added the proposal still "gives far too much power to regulators who have failed to protect consumers."

Shelby also has offered up another proposal that would create a Financial Products Consumer Protection Council to issue consumer rules, even though a similar proposal was rejected in a House floor vote.

The Shelby proposal stands as a marker against one offered last week by Senate Banking Committee Chairman Christopher Dodd, D-Conn. Dodd unveiled his revised CFPA proposal in a bid to pick up support from Sen. Bob Corker, R-Tenn., who has been the primary GOP negotiator in talks. The two met this weekend to try to reach a compromise on the issue, which is bitterly opposed by the banking industry.

The issue is the biggest hurdle in an effort to move a bipartisan package that would revamp the nation's financial regulatory structure. Dodd originally proposed a stand-alone agency with rule-writing, inspection and enforcement powers over home mortgages, credit cards and other financial products. But his revised proposal would place a Bureau of Financial Protection inside the Treasury, giving it rule-writing powers. It would not have examination or enforcement authority for banks with less than $10 billion in assets. A bank regulator could appeal a BFP decision to a proposed systemic-risk council comprised of regulators that would be created under the reform package.

But Republicans, according to sources, have rejected the revised Dodd draft. On his left flank, the Dodd bid angered consumer activists who have been arguing for the retiring senator to hold firm in talks.

"We are for an independent agency that is strong with real teeth," said Heather Booth, executive director for Americans for Financial Reform, a group of consumer and labor activists.

But consumer groups said they were not drawing a line in the sand with the revised Dodd proposal. Instead, they ask that the original CFPA plan be offered an up-or-down vote, either in committee or the Senate floor.

"It's very troubling, and we are seeking to strengthen it. And if the Republicans reject it, we will look for votes on the floor if we have to. We will look for votes in the committee if we have to," said Ed Mierzwinski, consumer program director for U.S. Public Interest Research Group.

On another front, financial trade groups are concerned over talks on how far to strip the Federal Reserve's oversight over banks. Dodd had originally proposed that such supervision powers of the Fed and the FDIC be taken away, then backed off on the latter. But there were signs over the weekend that the Fed's powers could still be in danger, according to one source, even though panel member Sen. Evan Bayh, D-Ind., expressed his support last week for a robust central bank.

Banks argue that the Fed must maintain a supervisory role to help carry out in its monetary policy, especially during a financial crisis.

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House chairman sees wholesale overhaul of GSEs

Bill Swindell — Fri, 22 Jan 2010 00:00:00 -0500

Fannie Mae and Freddie Mac should be abolished in their public-private structure and their future would lie within an overhaul of the nation's housing finance system, House Financial Services Chairman Barney Frank, D-Mass., announced on Friday.

In comments at a hearing on executive compensation at financial firms, Frank repeated his belief that the public-private structure as a government-sponsored enterprise will not work, given that the government took both over in September 2008 and has provided more than $100 billion to keep them viable. The GSEs guarantee or own more than $5 trillion in home mortgages.

"I believe the remedy is abolishing Fannie Mae and Freddie Mac in their present form and coming up with a whole new system of housing finance," Frank said.

Nationalization or privatization of both seems politically untenable in the political environment and shaky housing market. Frank said the panel will examine the future of both GSEs within a broader range of revamping the nation's housing finance structure, including the role of the Federal Home Loan Bank system and Ginnie Mae.

"We're sorting out the function of promoting liquidity in the market and also the secondary market in general, and also doing some sort of subsidy for affordability. I do not think they should be necessarily combined," Frank said. "I don't think [I know] anybody who thinks Fannie and Freddie should continue as they are. ... I'm surprised anyone thinks that's news."

The remarks came as House Republicans on Friday showcased their next attack on the Obama administration's handling of the economy by specifically focusing on Fannie and Freddie, most notably on the Dec. 24 decision to allow million-dollar bonuses to be paid to executives of the two mortgage giants.

GOP panel members charged they were unfairly denied their choice of their witness for the hearing. They lobbied to include Edward DeMarco, the acting director of the Federal Housing Finance Agency, who approved the compensation package for the two CEOs. It could total as much as $6 million for each, while annual pay for officers is capped at $500,000.

"We are paying these people bonuses to lose tens of billions of dollars of the United States taxpayer," said Financial Services Financial Institutions Subcommittee ranking member Jeb Hensarling, R-Texas. "What people do with their money is their business. What they do with the taxpayer money is our business."

Frank said he agreed the bonuses were too high and noted he will hold a hearing next month to examine the pay structure of public-sector entities, where DeMarco will testify.

The GOP push places the Democrats on the defensive on the executive compensation issue, an area where they have been on the offense against major Wall Street banks. Frank has made the issue a priority and included provisions in House-passed legislation to revamp the nation's financial regulatory system to allow shareholders of all public companies to have a vote on executive compensation packages. His bill contained a measure to allow regulators to restrict risk-based incentive pay.

But Frank has taken issue with the GOP effort, which includes legislation that would suspend the bonuses and subject compensation to the rate equal to the pay for federal employees. He noted that the Republicans lined up in opposition against two House-passed bills last year that would have given FHFA the authority to restrict bonuses for Fannie and Freddie executives.

Republicans also signaled they will be taking a hard stance on the future of both companies, preferring that they be spun into the private sector, with the aim of tapping into the populist backlash over government bailouts of the banking and auto sectors.

"The Republicans on this committee have put forth proposals to reform these institutions, because it is indisputable that Fannie and Freddie were the central role in the mortgage meltdown that we've experienced. They've helped ignite the economic crisis that has left millions of Americans unemployed," said Financial Services Capital Markets Subcommittee member Scott Garrett, R-N.J.

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Professor launches fight to save consumer protection agency

Bill Swindell — Tue, 19 Jan 2010 00:00:00 -0500

The chief proponent of a proposed Consumer Financial Protection Agency is ramping up efforts to save the proposal as Senate Banking Committee Chairman Christopher Dodd, D-Conn., considers slashing its reach.

Harvard University law professor Elizabeth Warren said Tuesday wrapping the agency into part of another department such as Treasury would greatly diminish its effectiveness. The CFPA appears to be the biggest sticking point in moving an overhaul of the nation's financial regulatory system, the next major White House legislative priority after healthcare reform, and Dodd has broached the compromise in private talks with panel Republicans, according to sources.

Dodd is also heading to the White House Tuesday to discuss his bill with President Obama.

"This agency is not about creating new tools. The tools have been there all along. This is about getting a cop on the beat who cares about using them," said Warren, who first proposed the idea of such an agency three years ago. "Putting this agency under the thumb of regulators who have already demonstrated that in every consumer-bank dispute they side with the banks just won't work."

Like the healthcare debate over the public option, the battle over the CFPA is shaping up as a line in the sand for liberal activists, whose energy helped elect President Obama and voted healthy Democratic majorities into both chambers. They contend that the CFPA -- which would strip powers from banking regulators and have the power to write and enforce rules as well as examine institutions to ensure mortgages, credit cards and other products are not abusive - is needed after a financial crisis sparked by predatory and risky home loans.

But the banking industry, led by a U.S. Chamber of Commerce effort, has fought a multimillion-dollar campaign to kill it. Such pressure on moderate Democrats led House Financial Services Committee Chairman Barney Frank, D-Mass., to narrow the agency's scope to win passage of his financial regulatory bill in December. The House bill would provide national banks a limited pre-emption from state consumer laws and allow only examination and enforcement for the biggest banks and credit unions.

The struggle has been even tougher in the Senate, where Banking Committee ranking member Richard Shelby, R-Ala., has publicly nixed the idea.

Amid reports that Dodd might further water down the agency, Warren wrote to supporters Monday asking them to contact Senate Banking member offices and create "visible public support" for CFPA in the media.

Consumer activists hope by making the CFPA a high-profile fight, pitting the average consumer against politically unpopular big banks, they can change the tide of the debate, especially as the White House has stepped up its criticism of the banking industry by proposing $90 billion in new bank taxes in the fiscal 2011 budget.

"We always knew this was a David vs. Goliath fight, but I don't believe that Washington can or will let Wall Street act like nothing has changed," Warren wrote in her e-mail letter.

While Warren was especially concerned with keeping CFPA a stand-alone agency, she also cited other issues. She noted, for example, that smaller community banks would be harmed if the Senate granted national banks a blanket pre-emption over state consumer laws.

"Big banks want to be able to do business in every town across the country without obeying local laws. That gives them an enormous competitive advantage against community banks. It puts local citizens at risk," said Warren, who also serves as chairwoman of the Congressional Oversight Panel of the $700 billion Troubled Asset Relief Program.

She also criticized the move to restrict the CFPA to only a rule-writing capacity, calling such an entity "toothless," and said the House version was "a reasonable compromise."

"Any agency that writes rules should be on the ground enforcing them," she said.

While Dodd has to bring Shelby on board to smooth Senate passage, Warren's endorsement also would be key as well, especially for liberals who are still angered the White House gave up on the public option on health care.

Warren declined to say Tuesday whether she would oppose a bill if she could not live with the compromise.

"I'm enough of a lawyer to say, let's wait and see what we got," she said.

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Industry resists proposal for single banking regulator

Bill Swindell — Tue, 05 Jan 2010 00:00:00 -0500

As Senate Banking Committee Chairman Christopher Dodd, D-Conn., tries to cobble together consensus to revamp the nation's financial regulatory system, he faces significant industry opposition over his proposal to consolidate the duties of four agencies into one national banking regulator, making it likely his idea will be scaled down when it comes to the Senate floor.

Dodd has ramped up talks with Banking Committee ranking member Richard Shelby, R-Ala., in a bid to craft a bill that could survive a cloture vote. The two issued a joint statement Dec. 23 that they will work to resolve differences before the chamber reconvenes.

Dodd has proposed creation of a Financial Institutions Regulatory Administration, which would result from a merger of the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Dodd goes further than a companion House bill or the Obama administration by stripping bank supervision duties from the Federal Reserve, which has jurisdiction over large bank holding companies and state-chartered banks, as well as those of the FDIC, which has oversight over most state-chartered banks. His measure would place those responsibilities with FIRA.

The Independent Community Bankers of America is launching an effort to retain FDIC oversight, arguing that the agency has been a good advocate for small banks at the federal level, especially under FDIC Chairwoman Sheila Bair, and that FIRA would be attuned more to big banks.

"The FDIC's authority is terrifically important to community banks, no question about that. We are adamantly opposed to a single regulator concept," said Steve Verdier, ICBA director of congressional relations.

The ICBA opposition is significant because no financial group fared better in the House bill than the community banks, mainly because lawmakers do not blame Main Street banks for causing the housing meltdown and credit crisis. ICBA also played a significant role in killing a Senate bill that would allow bankruptcy judges to write down the principal of a home mortgage to current value.

House Financial Services Committee Chairman Barney Frank, D-Mass., noted in a CNBC interview Tuesday that he did not think the FDIC language could survive, noting that it causes a lot of "consternation, unhappiness with state bank regulators."

Neil Milner, president of the Conference of State Bank Supervisors, has said the Dodd language would have "a disastrous impact upon our nation's banking industry and economy as a whole."

Speculation along K Street is that Dodd will have to drop the provision, given that his bill has other contentious items, such as creation of a Consumer Financial Protection Agency and language giving regulators the power to wind down a failed firm, that are more important to the Obama administration.

The Dodd-Shelby statement said the two agreed that "our regulatory structure needs to be modernized and streamlined while preserving the dual-banking system."

Dodd also faces concern over the Federal Reserve language. The Financial Services Forum, which supports regulator consolidation, argues the central bank should retain its supervisory role but relinquish its examination powers.

The forum, which represents the CEOs of the largest 18 financial firms, contends the Fed is the "financial fire department" that is tasked with looking at a wider breadth of the economy and that its unique powers as a central bank and a lender of last resort provide it with a necessary role to have oversight over financial holding companies.

"Supervisory powers are critical to the Fed's other important duties. For example, if the Fed is to responsibly lend from the discount window, it needs to know and understand those borrowing institutions," said John Dearie, the forum's executive vice president. "Merely having access to examination reports is not enough. Supervisory authority is essential."

But that quest faces an uphill battle. Dodd has called the Fed an "abysmal failure" in its supervisory role, and Shelby noted "all roads lead to the Federal Reserve" for regulatory shortcomings. The forum is trying to argue that the worst failures -- such as Bear Stearns, Lehman Brothers, Countrywide Home Loans and American International Group -- were not supervised by the Fed at either the supervisory or holding company level.

"We understand the Fed is unpopular and that some in Congress are looking for ways to pare back its powers," Dearie said. "But stripping the Fed of supervisory authority would be a mistake. A better alternative is to require the Fed to rely on the functional regulators for on-site examinations, as is currently the practice in supervising financial holding companies and their subsidiaries."

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House passes massive financial regulatory overhaul

Bill Swindell — Fri, 11 Dec 2009 00:00:00 -0500

The House on Friday passed the biggest overhaul of the nation's financial regulatory system since the Great Depression, after beating back an attempt to strike from the bill a new consumer protection agency to guard against abusive and unfair home mortgages, credit cards and auto loans.

The chamber voted 223-202 for the package authored by Financial Services Committee Chairman Barney Frank, D-Mass., the result of a year's work and compromise between liberals, who pushed for consumer protections and constraints on Wall Street firms, and Democratic moderates under K Street pressure. Twenty-seven Democrats joined all Republicans in opposition.

It is also one of the top three legislative priorities for the Obama administration and now goes to the Senate, where Banking Commitee Chairman Christopher Dodd, D-Conn., is attempting to craft a bipartisan bill.

The measure would create a council of regulators to monitor threats to financial markets, including the power to take over at-risk firms and place them into receivership, and place new oversight of the multitrillion-dollar over-the-counter derivatives market. It also would curb the power of the Federal Reserve, requiring it to seek approval for emergency lending and giving the Government Accountability Office greater powers to audit the central bank.

The CFPA was strongly opposed by the banking lobby, which argued that it was unwise to separate consumer protection functions from the regulation of a firm's safety and soundness and that it would narrow credit availability.

Banks unsuccessfully backed a rival amendment by Rep. Walt Minnick, D-Idaho, which would create a 12-member council of regulators with rule-writing responsibilities for all financial products, as well as safety and soundness concerns. That amendment failed, 223-208, with 33 Democrats voting in support. The amendment was the biggest threat to the underlying Frank bill, given the lobbying by the banking industry.

But Frank was able to make deals with key panel moderates that partially narrowed the agency's reach within a scope that consumer activists could still accept. The bill would allow banks and credit unions with less than $10 billion in assets to keep their current regulators for examination and enforcement, with CFPA serving as a backup role. It also would allow pre-emption of state consumer laws if the Office of the Comptroller of the Currency determined it would prevent, significantly interfere, or materially impair a federally regulated institution to engage in the business of banking.

The House also shot down a rival GOP substitute sponsored by Financial Services Committee ranking member Spencer Bachus, R-Ala., 251-175. Instead of creating a resolution authority for the federal government to take over troubled financial firms, the Bachus measure would have established a streamlined bankruptcy process and end federal conservatorship for Fannie Mae and Freddie Mac, placing them into receivership or spinning them into the private market.

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House panel OKs consumer protection agency

Bill Swindell — Thu, 22 Oct 2009 00:00:00 -0400

After five days of debate, the House Financial Services Committee approved legislation on Thursday to create a Consumer Financial Protection Agency to protect consumers against abusive and unfair home mortgages, credit cards and other financial products.

The 39-29 vote represents a victory for the Obama administration in its push to revamp the financial regulatory system and a defeat for the banking lobby that launched an aggressive campaign to sway moderate Democrats against the measure, contending it would complicate bank regulation with a new bureaucracy and lead to higher credit costs for consumers.

Two conservative Democrats, Reps. Walt Minnick of Idaho and Travis Childers of Mississippi voted against it, while Rep. Michael Castle of Delaware, who is running for an open Senate seat, was the only Republican to support the bill.

The measure would take consumer protection duties from federal bank regulators and transfer them to the proposed agency with additional oversight for payday lenders, check-cashing outlets and remittance providers. The agency would not have oversight of insurance and securities.

The bill was modified in two significant ways: It includes language allowing for a limited pre-emption of state consumer laws for federally regulated banks, and it excludes most banks and credit unions from primary enforcement and examination for the agency. Under the bill, the CFPA could take an enforcement action if the primary bank regulator did not.

"I will predict it will only get better from our standpoint going further," said Financial Services Committee Chairman Barney Frank, D-Mass.

Frank said he thought that Rep. Melissa Bean, D-Ill., would not offer a floor amendment to provide a complete pre-emption of state consumer laws but instead would work with him to clarify the pre-emption language.

The issue is of primary importance to banking lobbyists because national banks have been operating under a full range of pre-emption of state consumer laws since a 2004 Office of the Comptroller of the Currency ruling.

Bean has pushed her language, to the consternation of consumer activists and state regulators, but she backed off from pushing for a committee vote. Republicans then offered up the Bean language on their own amendment, but it failed Wednesday, 38-29.

"I think the general framework [on pre-emption] has been accepted," Frank said.

No banking group supported the measure, which was not surprising given that most ramped up their opposition to kill or severely weaken it.

Before approval, the panel adopted, 47-21, an amendment by Rep. John Campbell, R-Calif., that would exempt car dealers from agency oversight if they do not engage directly in lending. Frank said he would seek clarifying language because he thought it was too loose and could give dealers carte blanche to engage in abusive lending practices.

The panel defeated, 35-33, an amendment by Rep. Maxine Waters, D-Calif., that would expand CFPA coverage to for-profit colleges that facilitate student loans. Waters has been a longtime critic of those institutions, citing a recent GAO report that showed students at for-profit schools have a default loan rate of 23 percent, well above the rate for nonprofit institutions. But panel members had reservations about extending the agency's authority to the education realm, especially because the bill would exempt merchants and retailers from oversight.

The panel adopted, 35-34, another Waters amendment that would reaffirm language in the bill that attorneys are not excluded from CFPA oversight, except those providing bankruptcy and foreclosure services. Rep. Paul Kanjorski, D-Pa., switched his vote on the amendment, a change that ensured its adoption. Kanjorski mistakenly voted no initially, his staff said.

The CFPA is a major focus of discussion for Senate Banking Committee Chairman Christopher Dodd, D-Conn., in his talks with Banking ranking member Richard Shelby, R-Ala. The agency is a priority to Dodd, and lobbyists expect Shelby to get considerable concessions in the reform package if he agrees to accept it.

Shelby said Thursday that despite K Street speculation, talks with Dodd have not broken down, even though another Banking Committee member, Sen. Bob Corker, R-Tenn., said he sensed little movement.

Dan Friedman contributed to this report.

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SEC, Commodity Futures Trading Commission issue oversight recommendations

Jerry Hagstrom and Bill Swindell — Fri, 16 Oct 2009 00:00:00 -0400

The SEC and the Commodity Futures Trading Commission on Friday issued a report recommending 20 steps to expand their oversight over exchanges to bolster the nation's financial system, including some that would require congressional action.

The two agencies worked on the report to better coordinate their oversight of securities and futures markets and close loopholes that played a role in the financial crisis.

"Our agencies rose above the usual challenges and came together to offer meaningful recommendations to improve our oversight of the financial markets," CFTC Chairman Gary Gensler said in a statement. "Now we must continue to work together to implement these recommendations and work with Congress to secure necessary changes in statute to best protect the American public."

The report calls on Congress to pass legislation that would clarify each agency's authority over products exempted by the other. It would also outline how to settle jurisdictional disputes within a firm timeline.

Congress is working on those issues as part of a revamp of the nation's financial regulatory structure. The Obama administration and a House Financial Services bill would propose joint rulemaking between the agencies for most swaps and give power to the Treasury Department to resolve any rulemaking dispute.

The draft by the House Agriculture Committee, which holds its markup next week, would take a different path: The SEC would take the lead on rulemaking for security-based swaps, while the CFTC would have authority over the other types of swaps.

As for turf disputes, under the Agriculture bill either agency could initiate a challenge in the U.S. Court of Appeals for the District of Columbia.

The report calls for legislation to give more power to the CFTC over rules for exchanges and clearinghouses under the Commodity Exchange Act, as well as require foreign boards of trade to register with the CFTC.

Separately, in a conference call on Friday, Gensler said the agencies do not have legislative language for the changes they want Congress to enact, but he added the Obama administration wants those changes made as part of the financial services reform process. Gensler also noted that if the two agencies cannot agree on whether to approve a financial product, they have proposed a process under which Congress would decide.

Gensler said the House Financial Services bill "covers appropriate goals," but that he wants to "bring more people" under it.

But the bill came under fire Friday by Sen. Maria Cantwell, D-Wash., who said on MSNBC that the measure "has so many loopholes that the loophole actually eats the rule." She also argued that "50 to 90 percent of derivatives could still be off exchange."

The bill tells "end users like equity firms, like hedge funds, 'You don't have to play by the rules,'" she said. "The Treasury Department should be ashamed of themselves. They have blessed this deal."

Treasury officials have gone back on the Obama administration's proposals, added Cantwell, a longtime critic of the futures and derivatives industry and a member of the Senate Finance Committee.

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Treasury pushes for resolution authority

Bill Swindell — Tue, 29 Sep 2009 00:00:00 -0400

Against a congressional backdrop of bailout fatigue, the Obama administration is ramping up its outreach to pass legislation to revamp the nation's financial regulatory system, especially over the issue of unwinding financial firms whose collapse would threaten the broader economy.

The drive to establish a resolution authority -- in which the federal government can take over major firms, unwind their assets and get them back into the private market -- has taken on a greater sense of urgency as congressional critics charge that it would establish a permanent bailout system akin to the Troubled Asset Relief Program. TARP is slated to expire at year's end but can be renewed for another 10 months by the Treasury Department.

House Financial Services Chairman Committee Barney Frank, D-Mass., has even said that legislation would take a "death panel" approach to firms such as American International Group, which has received a federal line of credit worth more than $180 billion.

The administration is working with congressional Democrats to craft a bill that can withstand charges that it would lead to another AIG-type situation. "The most important thing to do is make sure banks and investors do not live with the expectation the government is going to bail them out. We have to make sure we build into our system the capacity to let institutions fail without igniting an inferno," Treasury Secretary Tim Geithner said on Tuesday in an interview with congressional reporters.

The administration has proposed a resolution system for large financial firms similar to what the FDIC does for failed banks. Under the proposal, the FDIC would be in charge of unwinding all firms except broker-dealers, which would be handled by the SEC. Taking over a firm would require a two-thirds vote by the Federal Reserve Board and the board of either the FDIC or the SEC, as well as the approval of Treasury.

Under the Treasury proposal, the holding companies would be required to have more conservative capital standards to cover unanticipated losses for the resolution. In addition, Treasury would be granted the authority to provide a line of credit to the failed firm, to be repaid after the firm was placed back into the private market.

Treasury has ruled out establishing a front-end fund to pay for the unwinding, an idea that would gain no congressional traction. "Resolution authority is not for savings banks; it is used to dismember, unwind, restructure, close institutions with less collateral damage and less risk to the taxpayer," Geithner said. He added the move to regulate the derivatives market would force a dramatic change.

"Our proposal is a revolution in the regulation of derivatives," he said. The Obama administration has proposed to force most standardized derivatives -- such as options, swaps and futures -- on to exchanges and into clearinghouses, which stand behind all trades and guarantee payment. It would still allow some to be made over the counter through bilateral trades, but those transactions would come with higher capital costs and additional reporting requirements.

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House lawmakers discourage extension of bank bailout

Bill Swindell — Fri, 25 Sep 2009 00:00:00 -0400

Twenty-eight House lawmakers wrote Thursday to Treasury Secretary Timothy Geithner requesting that he not extend the Troubled Asset Relief Program that is slated to expire at year's end amid indications that the Obama administration will renew it for 10 months.

Twenty-one Democrats and seven Republicans wrote to Geithner that the program should end on Dec. 31, citing several reasons, including poor oversight, funds that were allocated outside their original purpose of bringing more liquidity to credit markets and a belief that no more taxpayer money should be used to prop up banks.

"It is essential that our economy continue to rebound, but the TARP program has been flawed from the start and further spending in this program to bail out banks on the backs of working families across the country is not the best way to help our economy, or a good use of taxpayer dollars. Our financial markets must be stabilized and rebuilt while protecting American taxpayers," the members wrote. Rep. Paul Hodes, D-N.H., organized the letter.

The Obama administration faces a political quandary in renewing the program, given bailout fatigue in Congress -- especially actions the Federal Reserve has taken without any legislative approval, such as its $182 billion rescue of insurance conglomerate American International Group.

But Geithner has indicated that the administration might renew the program through Oct. 3, 2010, to ensure financial markets do not backslide.

"I think the classic mistake people make is they declare victory too soon; they put on the brakes too early; they withdraw these things and then the system has to go back and build more insurance against the risk of a bad outcome, and that could intensify the recession or reignite [it]," Geithner told the TARP Congressional Oversight Panel on Sept. 10.

The Obama administration points out that only $365 billion in TARP funds have been allocated and that more than $70 billion has been repaid. "We have been cautious about spending TARP funds so that we to get maximum impact for every taxpayer dollar invested," said Meg Reilly, Treasury spokeswoman.

At a Senate Banking Committee hearing Thursday, Herbert Allison, Treasury's assistant secretary for financial stabilization, told the panel that "it would be premature" for him to discuss what the administration may recommend as far as extension. Senators were not amused. "Your testimony has been a little bit amorphous," Sen. Judd Gregg, R-N.H., told Allison.

"We need to get some answers," agreed Banking Committee Chairman Christopher Dodd, D-Conn.

Dale Eisman contributed to this report.

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White House stepping up defense of consumer agency

Bill Swindell — Tue, 22 Sep 2009 00:00:00 -0400

Looking to regain the offensive in the overhaul of the nation's financial regulatory structure, the Obama administration has come out swinging on its effort to push for a proposed Consumer Financial Protection Agency, which has been stalled among qualms from moderate Democrats and strong industry opposition.

White House National Economic Council Director Lawrence Summers threw down the gauntlet on Friday when he said that opponents of the agency were running "death panel" ads trying to scuttle it by claiming that the CFPA would be so burdensome that a small business such as a florist would not be able to extend credit to customers.

"Advertisements are being run on behalf of florists and other Main Street merchants suggesting that somehow we envision a regulator that would make it impossible for a florist to extend credit to one of their customers. I doubt very much that any florists are paying for those ads. And I would suggest those ads are the financial regulatory equivalent of the 'death panel' ads that are being run with respect to health care," Summers said during a conference at Georgetown University.

President Obama on Saturday used his weekly address to also weigh in on the debate, specifically taking on big banks. "Not surprisingly, lobbyists for big Wall Street banks are hard at work trying to stop reforms that would hold them accountable, and they want to keep things just the way they are. But we cannot let politics as usual triumph so business as usual can reign," Obama said.

The strategy is a reverse of the path the White House has taken on the healthcare debate, where it allowed Congress to dictate the details and stayed out of the fight until late in the process, when opponents started gaining the upper hand over charges that it would benefit illegal aliens, create death panels and pay for abortions. The Obama administration intends to get ahead of the curve as both House and Senate negotiators are crafting the measure.

"We need to push back, and when you got messengers such as the president and the head of the NEC ... obviously that helps us a great deal," said Ed Mierzwinski, program director for the U.S. Public Interest Research Group.

Though not mentioned by name, Summers was clearly referring to the U.S. Chamber of Commerce's campaign against the CFPA, where it has used an advertisement featuring a butcher who offers credit to his customers. The Chamber claims the proposed agency would collect information about his customers' financial accounts and strip them of their credit choices.

"We think the things that Summers is pushing are consistent with what we support, which is making sure we are going after predatory products, that people aren't exposed to fraudulent products, making sure that disclosures are clear," said Ryan McKee, the Chamber's director for the Center for Capital Markets Competitiveness. "We're just concerned because we don't think this new federal agency necessarily addresses some of the key problems."

The Chamber has focused on what it contends is the broad scope of the proposed agency, particularly on the definition of who is covered in the draft bill proposed by Treasury, arguing it would ensnare businesses that had nothing to do with the financial crisis.

"If they don't intend for them to be covered, then rewrite the legislation so they are not covered," McKee said. "Whether or not they can reassure us that it is not their intent to cover the small businesses, a plain interpretation of this legislation would be they would be covered."

Treasury's draft legislation would give it the power to oversee consumer bank and credit products, taking away such power from various banking regulators who have been criticized for failing to prevent abuses in the mortgage and credit card markets.

It would have the authority to impose fines and refer for criminal prosecution those who engage in unfair, deceptive or abusive acts. It would be able to act when it reasonably concludes the product in question would likely cause "substantial injury" to consumers.

Mierzwinski called the Chamber's campaign misleading, saying the FTC has the power to go after businesses that engage in unfair and deceptive practices, and that it is an effort to shift away the focus on the banks who were responsible for contributing to the financial crisis.

"Anybody who sells products in the financial marketplace should be in the scope. The question is, should the agency be going after little butchers or is it going after big bad banks who are cheating their customers with overdraft fees?" Mierzwinski said.

House Financial Services Committee Chairman Barney Frank, D-Mass., is revising the Treasury draft in an attempt to ameliorate concerns that Blue Dog Coalition and New Democrat panel members have about the measure. For example, Rep. Melissa Bean, D-Ill., is pushing for greater federal pre-emption and Rep. Ed Perlmutter, D-Colo., is concerned about the agency's enforcement powers.

A Financial Services Committee markup on the bill was slated before the August recess but has been delayed until mid-October as Frank worked on concerns that were brought to him. "Some of the moderates don't seem to be looking beyond the talking points," said Travis Plunkett, legislative director of the Consumer Federation of America.

Frank is expected to clarify in his revised draft, which could be released this week, on who will be included under the scope of the bill. He has already said a Treasury provision to require firms to offer "plain vanilla" products will not be included, but, rather, he would push for greater disclosure on the variety of products that are offered in the marketplace.

"They will pass CFPA," said one business lobbyist of the House Financial Services Committee. "I know we can make it much better, but there's no way to kill it." Frank's goal is to get as much of a pro-consumer vehicle out of the House to provide room in negotiations with Senate Banking Committee Chairman Christopher Dodd, D-Conn., who must get Banking ranking member Richard Shelby, R-Ala., on board to pass a bill out of the Senate.

Dodd insists that any beefed-up consumer protection must be done through an independent agency and not carried out among various regulators. "For him, the line in the sand is making it an independent agency," a Dodd aide said. "If everybody is responsible for consumer protection, everybody makes it their last priority."

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Treasury chief signals administration will renew TARP program

Bill Swindell — Fri, 11 Sep 2009 00:00:00 -0400

Treasury Secretary Tim Geithner Thursday gave an upbeat prognosis about the effect the $700 billion Troubled Asset Relief Program has had in stabilizing the economy, but strongly indicated the administration will renew the program for another year to ensure financial markets do not backslide.

Geithner told the TARP Congressional Oversight Panel that the program passed by Congress last year in the midst of a credit crisis has settled the economy, buffeting many banks that have paid back more than $70 billion to the Treasury. He expects that another $50 billion will be repaid within 18 months.

"As we enter this new phase, we must begin winding down some of the extraordinary support we put in place for the financial system," Geithner told the five-member panel. He noted the administration has removed from its budget projections a proposed additional $750 billion stabilization fund as the economy has shown signs it could emerge from the recession. In addition, the Treasury's guarantee of money market mutual funds will end and the FDIC's program to guarantee senior debt has declined as the private sector has filled the void.

But Geithner strongly hinted the administration would renew the program, which is slated to expire on Dec. 31, because of fears that a lack of liquidity could stall a recovery. The law allows the Treasury secretary to extend TARP through Oct. 3, 2010 -- two years after former President George W. Bush signed the program into law.

The option to extend TARP is likely the only option the administration will have to use funds to bolster the economy after passage this year of a $787 billion stimulus package, which has triggered bailout fatigue among members of both parties. Republicans were incensed when the Bush and Obama administrations extended more than $76 billion to stave off collapses of General Motors Corp. and Chrysler LLC. The COP reported Wednesday that taxpayers are unlikely to recover the entire amount of funding loaned to the automakers.

"I think many Americans share a fear that I have that an emergency piece of legislation that was meant for economic stability has now morphed into essentially a $700 billion evolving bailout fund for the administration," said Rep. Jeb Hensarling, R-Texas, a member of the oversight panel. He noted that Obama said Wednesday in his speech to a joint session of Congress that the administration helped rescue the economy from the brink off a collapse. "If that is true, why do we need this TARP statute?" Hensarling said.

Geithner defended the program, saying the cost and availability of credit have improved, confidence in the financial system has been bolstered, and the risk to the system has dissipated. He also said the federal government has received on average of an 18 percent return on its TARP investments as banks repay the funds.

"So that argues, in a way, for ending the program" asked panel member Paul Atkins, a former SEC Commissioner.

Geithner said there was no science to solving the financial crisis.

"The art in this is, if you commit to do enough and you make that credible to people, you're not going to be behind, always chasing an escalating crisis, then you're more likely to solve it at lower cost. If you -- if you prematurely pull it back, you're going to live with too much risk. It's going to be more expensive in the future," Geithner said. "That's the basic central design of effective strategy in financial crises."

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Overhaul opponents highlight turf battles

Bill Swindell — Thu, 13 Aug 2009 00:00:00 -0400

As the battle over the proposed Consumer Financial Protection Agency heats up, opponents are focusing on regulators' qualms to make their point instead of emphasizing complaints of the industry that stands to come under tighter scrutiny.

The outline can be seen in recent letters to House Financial Services Committee ranking member Spencer Bachus, R-Ala., on the Obama administration proposal, which would create an agency modeled on the Consumer Product Safety Commission for rule-writing, examination and enforcement for financial products such as credit cards, mortgages, payday loans and credit insurance products. Bachus is leading the charge against legislation to create the agency, which is part of the administration's plan to revamp the nation's financial regulatory structure. It is slated to be marked up next month in his committee.

FTC Commissioner Thomas Rosch, a Republican, has told Bachus the Obama administration is asking the public to buy a "pig in a poke." In a July 16 letter, he wrote that the only certainty "is that the creation of this new agency would result in considerable delay in protecting consumers, wasteful and inefficient consumer protection law enforcement, and very substantial if still indeterminate cost."

Another FTC Commissioner, William Kovacic, wrote that the proposal to give the FTC backstop authority to bring enforcement actions against financial firms would be "anything more than a mirage."

FTC Chairman Jon Leibowitz, appointed by President Obama, does not see the proposal as a threat and is working with the Treasury Department to ensure the bill would ensure his agency would even gain some new authority, such as streamlined rulemaking and the ability to impose civil penalties for unfair and deceptive practices.

The regulators' opposition to the CFPA has also been voiced by the Federal Reserve and Comptroller of the Currency John Dugan, who said in an Aug. 4 letter that the proposed agency's rulemaking authority would be undercut by allowing states to enact even tougher laws. Furthermore, he wrote, it would not address safety and soundness concerns raised by bank regulators.

The pushback from regulators has been so severe that Treasury Secretary Timothy Geithner reportedly pushed them in a contentious July 24 meeting to get on board the administration's plan. The regulators' concerns have given a boost to a coalition of financial groups opposing the proposal, taking the focus off the industry's actions on some abusive credit card practices and predatory mortgages that played a role in the banking crisis and turning it toward interagency turf battles and power plays.

House Financial Services Committee Chairman Barney Frank, D-Mass., has said it is not surprising that regulators are pushing back against a plan that would take away some powers from their respective agencies. But he believes the bill should pass because the existing system has too many lapses.

Lawmakers might be forced to make further concessions to regulators as the bill moves forward. For example, FDIC Chairwoman Sheila Bair, who has a good relationship with Frank and Senate Banking Committee Chairman Christopher Dodd, D-Conn., has spoken out in favor of such an agency. She added examination and enforcement in consumer protection should be retained by banking regulators and not given to the proposed agency.

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Consumer protection agency plan questioned

Bill Swindell — Wed, 08 Jul 2009 00:00:00 -0400

Facing skeptical House Energy and Commerce members concerned over losing jurisdictional turf, Obama administration officials said Wednesday a proposed Consumer Financial Protection Agency would not seriously impact the Federal Trade Commission and would ultimately provide a greater benefit to consumers who have been targeted for predatory loans and abusive credit card practices.

Assistant Treasury Secretary Michael Barr and FTC Chairman Jon Leibowitz both made their pitch to the Energy and Commerce Commerce, Trade, and Consumer Protection Subcommittee Wednesday, arguing the FTC would gain new authority, such as streamlined rulemaking and the ability to impose civil penalties for unfair and deceptive practices, even though it would also have to give up some power to the new agency over supervising financial firms.

"The FTC is a good agency. The chairman ... and I are good friends. Our legislation does not affect the jurisdiction of the FTC over the vast array of nonfinancial markets and actually strengthens its ability to police those markets," Barr said.

Leibowitz said consumers would "be getting a better deal" under the Obama draft bill because the FTC does not have authority over banks -- which resides with banking regulators -- while the proposed agency would.

Their testimony comes as House Financial Services Committee Chairman Barney Frank, D-Mass., plans to file a bill Wednesday to create the agency, which is strongly supported by consumer groups but is ardently opposed by financial lobbying groups.

Frank also will have to avoid turf battles with the Energy and Commerce Committee, which were more common under the panel's previous chairman, Rep. John Dingell, D-Mich.

Although the administration testimony was met with skepticism among most Republicans and some Democrats, Energy and Commerce Committee Chairman Henry Waxman, D-Calif., said he would support the plan as long as the FTC "is strengthened, not weakened by any changes."

Energy and Commerce Commerce, Trade, and Consumer Protection Subcommittee ranking member George Radanovich, R-Calif., pressed Leibowitz, noting that his agency would be giving up some turf in the proposal even with the proposed sweeteners. "It seems to me you are getting ... more money and authority to do less," Radanovich said.

Leibowitz countered his agency would still retain backstop authority on financial matters, but that consumers would ultimately benefit because the new agency would have expanded powers over mortgage lending, credit insurance and credit cards.

"We're going to be able to do more for consumers," Leibowitz said.

But Leibowitz did call for some revisions to the Treasury draft such as shortening the review period that the FTC would have under its backstop authority to take action and clarifying terms such as "credit" and "financial activity" in the draft.

He said the latter were broad and could lead to uncertainty over whether his agency or the new entity would take action in cases such as illegal telemarketing for financial products.

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Administration pitches consumer protection overhaul

Bill Swindell — Tue, 30 Jun 2009 00:00:00 -0400

The Obama administration Tuesday sent legislation to Congress to create a Consumer Financial Protection Agency that would oversee consumer bank and credit products, taking away such power from the banking regulators who have been criticized for failing to prevent abuses in the mortgage and credit card markets.

The 152-page draft bill largely hews to the outline that Treasury Secretary Tim Geithner unveiled this month to overhaul the nation's financial regulatory system, creating an agency modeled on the Consumer Product Safety Commission for many financial products.

"This agency should have strong powers not to just set rules, but also to supervise institutions and to examine institutions and enforce with respect to institutions," said Michael Barr, Treasury assistant secretary for financial institutions.

The agency would have the power to impose fines and refer for criminal prosecution those who engage in unfair, deceptive or abusive acts. It would be able to act when it reasonably concludes the product in question would likely cause "substantial injury" to consumers. But the draft bill would exclude securities products such as mutual funds and keep such enforcement under the SEC, while futures would fall under the jurisdiction of the Commodity Futures Trading Commission.

The draft did not include any language on regulating the property and casualty insurance market, where states have jurisdiction. The federal standards would be a floor where states could enact even tougher measures and state attorneys general could enforce. But the new agency would not be allowed to impose usury limits under the draft bill.

As for mortgage regulation, the agency would have to propose within one year a mortgage disclosure form that would combine requirements under the Truth In Lending and Real Estate Settlement Procedures acts, which banking regulators and HUD have struggled for years to do.

In addition, the agency could ban mandatory arbitration in financial contracts, a win for the trial lawyer lobby, which has been pushing Congress to roll back such contracts that have become more ubiquitous for consumer purchases.

The draft bill would establish a framework under which employees from the Federal Reserve and other banking regulators would be transferred into the agency to ramp up its efforts. But it does not detail how the agency would be funded.

The House Financial Services Committee is slated to mark up its Consumer Financial Protection Agency legislation before the August recess, while the Senate Banking Committee plans to incorporate its bill into a larger overhaul measure this fall.

"While the committee will, of course, exercise its own judgment on the specifics ... it is helpful to have the administration's proposals as well because I believe there is a great deal of common ground between us," said House Financial Services Chairman Barney Frank, D-Mass.

House Republicans are against the proposal, arguing that such enforcement should remain with frontline regulators who know the issue better. "A consumer financial protection agency would be the creation of yet another regulator, with human error encouraged by separating regulatory decisions from the already limited expertise found at prudential regulatory agencies," said House Financial Services Capital Markets Subcommittee ranking member Scott Garrett, R-N.J.

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Facing skeptics, Treasury chief defends regulatory overhaul

Bill Swindell — Thu, 18 Jun 2009 00:00:00 -0400

Senate Banking Committee members Thursday criticized Treasury Secretary Tim Geithner's proposal to make the Federal Reserve a super-regulator that would monitor for systemic risk throughout the financial system - a key platform of the Obama administration's plan to revamp the nation's regulatory framework.

Banking Committee ranking member Richard Shelby, R-Ala., disputed Geithner's contention that the Fed is the only agency that could ensure the failure of one firm would not bring down others and cripple markets. Such a position "reflects a grossly inflated view of the Fed's expertise," Shelby said.

Shelby listed all the roles the Fed performs, such as setting monetary policy, monitoring bank regulation and providing consumer protection.

"These responsibilities conflict at times and some receive more attention than others. I do not believe that we can reasonably expect the Fed or any agency to effectively play so many roles," he said. The comments by Shelby, whose support will be critical to move a bill on a bipartisan basis, reflected many GOP concerns over the Obama plan.

A former president of the New York Fed, Geithner is fighting for the central bank to play the role of sole super-regulator. Some lawmakers have called for a council of regulators to play such a role, but Geithner dismissed that notion, saying, "You don't convene a committee to put out a fire."

But realizing congressional resistance, Geithner made some concessions. He proposed that a council of regulators advise the Fed on its proposed role; that Treasury have the power to sign off on any new emergency lending; and that responsibility for consumer protection be shifted from Treasury to a new agency.

Sen. Mark Warner, D-Va., suggested a more robust council approach because it would bring in expertise from areas outside the Fed's mandate. For example, the SEC would provide knowledge on securities issues, and the council could deploy a staff solely focused on evaluating systemic-risk issues.

By contrast, Geithner's proposed council "has the ability to gather information but does not have the ability to act in any way. It will not provide the nonsilo approach that I think we are looking for," Warner said.

Sen. Robert Menendez, D-N.J., agreed with Warner and asked Geithner what would happen if one agency or the full council disagreed with the Fed. Geithner responded that his plan contains checks and balances, with the council having to send reports to Congress. In addition, he said, its recommendations would be public, which would help lawmakers carry out oversight responsibilities.

Sen. Robert Bennett, R-Utah, said he opposed a proposed change in the Bank Holding Company Act that allows commercial firms to charter or acquire industrial loan companies, which are state-chartered banks that offer limited financial services. The Geithner plan would require all businesses that control an insured depository institution to be subject to Federal Reserve supervision. ILCs are major business in Utah. "In this proposal you are killing one very major source of credit where there has been no difficulty with respect to the -- the crisis," said Bennett. "You said we're trying to deal with those that were essential to the crisis. I'm talking about ILCs."

Geithner replied the administration wanted all depository institutions under a single regulatory framework to prevent firms from migrating to one with lower standards.

Another GOP critic, Sen. David Vitter of Louisiana, pushed Geithner to include a revamp of Fannie Mae and Freddie Mac, but the Treasury secretary indicated that would come next year.

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Lawmaker pushes insurance office as part of financial regulatory overhaul

Bill Swindell — Tue, 16 Jun 2009 00:00:00 -0400

A top House Democrat Tuesday said he would push his bill to create an Office of Insurance Information within the Treasury Department as part of an overhaul of the nation's financial regulatory system.

The office would establish federal policy on international insurance matters to ensure they are consistent with state laws as well as advise the secretary on major domestic and international insurance issues.

Financial Services Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., said he is confident the Obama administration would endorse his bill. "Only ostriches can now deny the need for establishing a federal insurance resource center and a basic federal insurance regulatory structure," said Kanjorski during a hearing on the subject.

States regulate lines such as property and casualty, life and reinsurance markets. But with the Obama administration set to release its plan to overhaul the regulatory system Wednesday, the federal government is likely to play a bigger role in overseeing the industry.

The plan is expected to have the Federal Reserve serve as a lead agency in monitoring against systemic risk to the entire financial system, i.e., the danger that the failure of one firm could trigger a market downfall such as Bear Stearns and American International Group did. The proposal is also expected to suggest a council of regulators who would serve as an adviser to the Fed.

"The broad principle is that a lack of oversight, a series of regulatory gaps allowed financial institutions -- not just banks, but nonbank institutions -- to engage in wild risk-taking that didn't simply imperil those institutions but imperiled the United States economy and had a profound recessionary effect on the world economy," President Obama said Tuesday in previewing the plan.

The debate over insurance has stymied policymakers because of divisions within the industry between large, multinational carriers that want creation of a federal regulator and those who want to protect a state-based system. The Kanjorski bill is viewed as the best compromise that could pass Congress as it has encountered less opposition than other insurance measures.

Kanjorski said the federal government should "actively regulate" lines that pose systemic risk to the nation's economy, such as bond insurers, mortgage insurers, and reinsurers. But he did not mention life insurance, an industry that has vigorously lobbied for a federal charter, arguing that its products are more national in scope, akin to those offered by mutual funds.

Financial Services Capital Markets Subcommittee ranking member Scott Garrett, R-N.J., said he was concerned about reports the Fed would serve as systemic-risk regulator because it has no experience on insurance issues. John Hill, testifying for the National Association of Mutual Insurance Companies, agreed. "You would have someone regulating insurance that has no real insurance background," Hill said.

Hill added the property-and-casualty market is different from other fields in the financial services sector because it has conservative portfolios that are liquid as well as low leverage ratios and strong solvency regulation from the states.

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SEC official sees 'logic and efficiency' with merger

Bill Swindell — Tue, 02 Jun 2009 00:00:00 -0400

SEC Chairwoman Mary Schapiro said Tuesday a possible merger between her agency and the Commodity Futures Trading Commission makes sense, but the two agencies could work well together even if lawmakers do not combine the two market watchdogs.

Schapiro told the Senate Financial Services Appropriations Subcommittee that Congress ultimately would have to make the decision on a possible merger, but noted that she had a unique perspective since she served as chairwoman of the CFTC under the Clinton administration and before that was an SEC commissioner.

Sen. Jon Tester, D-Mont., pressed Schapiro whether investor protection would be better served with a combined agency in the aftermath of problems at both understaffed agencies. Some critics have cited examples such as the SEC's inability to detect fraudster Bernard Madoff and the CFTC not having the authority to regulate the over-the-counter derivatives markets, in which American International Group placed bets that later doomed the firm.

"My personal view is there is a logic and efficiency that can be achieved between a merger of the two agencies. But short of that, I also think the two agencies could do a better job of working together to ensure protection of investors," Schapiro said.

Even without a merger, Schapiro added, she can have a strong working relationship with CFTC Chairman Gary Gensler "to ensure that products and practices don't fall between the cracks between the two agencies, and that we don't leave large swaths of the financial markets unregulated and unaccountable to the American public."

Debate over a merger will pick up later this year as Congress begins to revamp the nation's financial regulatory structure. But proponents of such a merger will have to overcome reservations from both the Senate and House agriculture committees, whose leaders fear that they would lose jurisdiction and power over a combined agency whose focus of food commodities would be a small portion of its overall charter.

Senate Financial Services Appropriations Subcommittee Chairman Richard Durbin, D-Ill., and ranking member Susan Collins, R-Maine, said they felt the SEC has been underfunded. Even though the Obama administration has proposed an fiscal 2010 budget of $1.026 billion, a 7 percent increase from fiscal 2009, Collins warned the budget would do little to expand agency personnel because of attrition. It currently has 3,652 full-time employees. She asked Schapiro whether it would be helpful to ramp up staffing at the agency. "We can use more boots on the ground, absolutely," Schapiro said.

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Panel says Fed should monitor systemic risk

Bill Swindell — Tue, 26 May 2009 00:00:00 -0400

The Committee on Capital Markets Regulation argued such authority should be vested with the central bank because it would ensure there would be clear accountability and authority to act to prevent a collapse of a major firm that could imperil the U.S. economy. A council approach would be inefficient, indecisive and compromising, the panel added. "We feel that is just continuing the problems of the past," said Hal Scott, a Harvard University law professor who served as committee director. "If everybody is responsible, then nobody is responsible."

The federal government has acted on an ad-hoc basis to intervene in cases to prevent the collapse of Bear Stearns, Fannie Mae and Freddie Mac, with the Fed and the Treasury Department playing a leading role.

But lawmakers appear reluctant to vest the central bank with expanded authority. Some liberals cite its past lack of consumer protection to prevent predatory mortgages, while conservatives say it would take away from its main role to set monetary policy.

But the committee hopes its recommendations will have some sway on Capitol Hill, given that its members represent an array of business, academic and regulatory communities.

They include Glenn Hubbard, chairman of the Council of Economic Advisers under former President George W. Bush; John Thornton, chairman of Brooking; and Wilbur L. Ross Jr., chairman of WL Ross & Co.

The panel also called for greater regulation of the derivatives market, requiring that most over-the-counter trades be made through a clearinghouse system that has reporting requirements.

The call for greater regulation comes in response to the credit-default swap crisis that led to the downfall of American International Group Inc. after the company overleveraged its bets on the market.

Hubbard said the committee's position could be viewed as a stronger regulatory response than the Obama plan pushed by Treasury Secretary Timothy Geithner. "He's used the word 'encouraged' while we have used the word 'required.' It is definitely a similar theme," Hubbard said.

Scott noted the panel also called for a more robust overhaul of how the government takes over nonbanks such as AIG. The Treasury Department has proposed an FDIC-like entity that could take over such nonbanks, even though such companies are not designated in advance as "too big too fail."

The panel recommends that lawmakers spell out that all financial companies and their holding companies would be covered. "I think the Geithner proposal has the problem of identifying in advance systemically important institutions, or if they don't identify, confusing people to what insolvency regime will actually be applicable to a particular institution," Scott said.

The panel also called for confidential reporting for hedge funds and new capital standards for banks, allowing higher standards for boom times and looser standards during bear markets.

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Witnesses call for new financial risk regulator

Bill Swindell — Tue, 24 Mar 2009 00:00:00 -0400

Federal Reserve Chairman Ben Bernanke suggested Tuesday that federal agencies could split the task of taking over troubled nonbank firms such as American International Group, whose collapse could have brought down the U.S. financial sector.

Bernanke and Treasury Secretary Tim Geithner agreed with House Financial Services Committee Chairman Barney Frank, D-Mass., during a committee hearing that Congress should pass legislation that would create an FDIC-like authority that could take over nonbanks and unwind their assets. Geithner said such an entity would fill "a significant void" in the current system that has forced the federal government to provide $182 billion in assistance to keep AIG solvent after the company suffered massive losses by engaging in credit-default swaps.

In his testimony, Geithner hinted that Treasury would play a lead role to provide help to troubled firms, purchase their assets, assume their liabilities and purchase equity interests. The government also should have the power to sell or transfer assets and liabilities as well as void or change contracts, such as the $165 million in executive bonuses to AIG employees, Geithner said.

Rep. Melvin Watt, D-N.C., told Geithner he was concerned about giving the Treasury secretary such power, suggesting that it would be better handled by officials facing less political pressure. But Geithner stressed any decision-making would be done on a consultative basis. "We want to use a mechanism built on the current FDIC model, where a judgment to intervene in some sense requires a judgment by the president and the secretary of the Treasury, by the chairman of the Fed and by the board, and ... the board of the FDIC," Geithner said.

Bernanke suggested that duties could be split, with the FDIC in charge of unwinding and selling assets, as it already does in the case of banks, and another agency in charge of regulating the safety and soundness of a hedge fund, insurance carrier or private equity firm. Bernanke did not say which agency should handle the latter. Frank said he would try to move on legislation quickly, perhaps dropping a bill into the hopper by next week.

Geithner also came under some criticism for his plan to have the federal government and private investors purchase up to $1 trillion in toxic assets to unfreeze credit markets. Rep. Michael Capuano, D-Mass., said he was concerned about the risk that the FDIC would be assuming under the plan by providing leverage funding, about 80 percent of the purchase price, for the buying of whole loans.

Geithner noted that FDIC supports the program and has had experience in unwinding such assets. Frank said he was in favor of the Geithner plan and did not share Capuano's concern. "If I thought the FDIC was going to be in danger, I would have those concerns," Frank said. "The FDIC has to be totally insulated from any failure and I'm sure it will be."

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Oversight board: Treasury overpaid $78 billion for bank stocks

Bill Swindell — Thu, 05 Feb 2009 00:00:00 -0500

A Senate panel was told Thursday that the Treasury Department has overpaid $78 billion for bank stocks and warrants it took in firms participating in the Troubled Asset Relief Program, providing further ammunition to congressional critics who could thwart efforts by the Obama administration to ask for more financial sector aid.

Elizabeth Warren, chairwoman of the TARP congressional oversight board, told Senate Banking Committee members on Thursday that her group did a valuation study on the $254 billion in TARP transactions in 2008 and found that Treasury only received assets worth approximately $176 billion.

Warren laid blame on former Treasury Secretary Henry Paulson for using a uniform standard in pricing stocks across the board, rather than pricing for risk according to each institution.

"Despite the assurances of then-Secretary Paulson, who said the transactions were at par -- that is, for every $100 injected into banks, the taxpayer received stocks and warrants from banks worth about $100 -- the valuation study concludes that Treasury paid substantially more for assets it purchased under the TARP than their then-current market value," Warren testified.

Expressing shock, Senate Banking Chairman Christopher Dodd, D-Conn., called the $78 billion figure "a pretty large disparity." Warren noted that Paulson could have had some legitimate reasons for setting a uniform price. For example, he could have said it was easier to implement or that it was the quickest way to get money out to stabilize the financial sector -- but with the result of a larger subsidy from taxpayers to banks.

Banking ranking member Richard Richard Shelby, R-Ala., a strong TARP critic, was incensed. "They misled Congress. ... Did they not?" Shelby asked Warren. He then answered his own question. "Absolutely. ... They said one thing and did another." The study by Warren's committee is higher than a Congressional Budget Office estimate that found a subsidy of $64 billion on $247 billion worth of TARP transactions. Warren said she believes that the CBO numbers are understated.

The revelation will put additional pressure on Treasury Secretary Timothy Geithner to make sure he gets a better bargain on what he does with the remaining $350 billion in TARP funds. That's especially true with the difficult task in purchasing toxic assets from troubled banks -- such as devalued subprime mortgages -- that are weighing down their ability to lend.

Geithner must decide whether to pay the current market price, forcing already shaky banks to write off even more losses, or to pay more for their long-term prospects, which could force an even greater taxpayer subsidy. Complicating matters, many believe the Obama administration will have to ask for even more than the $700 billion Congress allocated for TARP. Geithner testifies before the panel Tuesday.

The administration has pledged greater transparency and at least $50 billion toward home-foreclosure prevention.

"The political support for putting up the money will not be there," said Sen. Robert Bennett, R-Utah. "I hope the administration will understand it."

Sen. Jim Bunning, R-Ky., noted that Geithner -- the former head of the New York Federal Reserve -- was with Paulson as he was making his TARP decisions.

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Witness to describe SEC's 'abject failure' in Madoff case

Bill Swindell — Wed, 04 Feb 2009 00:00:00 -0500

A whistleblower is slated to testify Wednesday about an "abject failure" at the SEC that prevented investigators from uncovering Bernard Madoff's alleged $50 billion Ponzi scheme, claiming the arrogance and ignorance of the head of its New York office helped derail any probe.

Harry Markopolos, a Boston-based investor turned fraud investigator, is slated to tell House Financial Services Committee members of his eight-year quest to get the SEC to investigate Madoff.

Prosecutors allege the former NASDAQ chairman set up a phony set of records to cover up billions in fraud perpetrated on his investors, ranging from European royalty to actor Kevin Bacon.

In 24 pages of prepared testimony obtained by CongressDaily, Markopolos spells out his frustration of trying to alert SEC officials that Madoff's returns were not mathematically possible and that his investment strategies would have trouble even breaking even -- once fees and expenses were included.

He initially contacted SEC's Boston office. But Markopolos got little traction, noting "that financial illiteracy among the SEC's securities lawyers was pretty much universal, with few exceptions."

He persevered over the next few years and will testify he finally found a receptive audience in 2005 with Mike Garrity, branch chief of the SEC's Boston office.

Garrity sent the case to the SEC's New York office, where he put Markopolos in contact with its chief, Meaghan Cheung.

Markopolos slams Cheung in his testimony, indicating that she "never grasped any concepts in my report, nor was she ambitious enough or courteous enough to ask questions of me."

He will testify that Cheung dismissed him by noting she handled the criminal case against Adelphia Communications and convictions of its top executives.

"Ms. Cheung never expressed even the slightest interest in asking me questions; she told me that she had my report and that if they needed more information they would call me," he writes.

Markopolos then reached out to Wall Street Journal reporter John Wilke. He notes that while Wilke was eager to investigate, the Journal's editors apparently never gave him their approval to start reporting. Markopolos thought he had his biggest breakthrough in 2006 after talking to a Chicago Board Options Exchange official and learning its traders suspected Madoff was a fraud.

He noted the official, Matt Moran, received permission to talk to the SEC and the Journal, but neither organization followed any leads he provided.

Markopolos adds that he and some members of his informal investigative team felt threatened and thought Madoff could stifle them if their efforts would be discovered.

He said they did not go to the FBI because they felt they would not be taken seriously because of the SEC's lack of interest and their decision not to contact the Financial Industry Regulatory Authority, an independent watchdog group, because Madoff had been chairman of its predecessor organization.

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