By Mark Huffman
ConsumerAffairs.com
November 10, 2009
Senate Banking Committee Chairman Christopher Dodd (D-CT) has proposed legislation that would create a Consumer Financial Protection Agency, removing much of the regulatory authority in that area from the Federal Reserve and Federal Deposit Insurance Corporation.
Similar legislation has been proposed in the house, though the Dodd bill goes further than any house bill. Dodd says the legislation is not punitive in nature but is aimed at providing protections for consumers and individual investors. Democrats on the Banking Committee appeared with Dodd at a Capital Hill news conference to pledge support for the measure.
"Never again should the American taxpayer hear the term 'too big to fail,' and be asked to bail out financial institutions," said Sen. Mark Warner (D-VA).
The bill specifically addresses "too big to fail," and effectively ends it. It would prevent excessively large or complex financial companies from taking on so much systemic risk that they threaten to bring down the economy.
"Funeral plans"
It would do that by imposing tough new capital and leverage requirements and requiring financial institutions to write their own "funeral plans." It would also require the financial industry to provide its own capital injections, update the Fed's lender of last resort authority to allow system-wide support but not prop up individual institutions; and establish rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
The Dodd bill creates an independent agency with a board of regulators to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the financial system. The agency could require companies that threaten the economy to divest some of their holdings.
It would end what Dodd calls the "convoluted system" of multiple federal bank regulators. In addition to taking authority from the Fed and FDIC, it would abolish the Office of Thrift Supervision and Office of the Comptroller of the Currency.
Tricky task
Eliminating government agencies is also a tricky task for Congress, since bureaucracies have constituencies that can effectively lobby lawmakers. Dodd also has yet to solidify Republican support for his measure, though at Tuesday's news conference, he expressed confidence he would be able to do that. Thus far, ranking Republican Richard Shelby (R-AL) has declined to support the Dodd bill because it establishes a stand-alone Consumer Financial Protection Agency.
Dodd says the measure is needed because it would provide tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies to protect investors and businesses.
President Obama has also proposed legislation to address systemic risk in the economy, but neither his nor those advanced by House Financial Services Committee Chairman Barney Frank (D-MA) would eliminate any agencies.
Frank's committee has drafted legislation that would set up an independent consumer protection agency, tighten rules for derivatives and mandate federal regulation of hedge funds, which currently are unregulated. Frank said he expects House action of his bill before the end of the year.
Should that happen -- and should the Senate pass the Dodd bill -- the two measures would have to be reconciled in a conference committee before being sent to President Obama for signing.
