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David Weidner's Writing on the Wall
March 16, 2010, 12:01 a.m. EDT · Recommend (4) · Post:
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By David Weidner, MarketWatch
NEW YORK (MarketWatch) -- Here's one way of looking at Sen. Christopher Dodd's financial reform bill: if Wall Street hates it, it can't be all bad.
Dodd, the Connecticut Democrat, aims to finish his 35-year run in the U.S. Senate by reshaping a financial services industry that ran amok on his watch. The chairman of the banking committee went rogue on Monday, announcing his own sweeping reform bill after negotiations with Republicans broke down.
"Our regulatory structure...remains hopelessly inadequate," Dodd said Monday.
Reuters U.S. Senate Banking Committee Chairman Chris Dodd
The bill includes much of the restrictive architecture Wall Street feared. Included is the Volcker Rule restricting risky bank activities, including proprietary trading. It includes a framework for over-the-counter derivatives. Banks will have to keep some skin in the game when it comes to securitization. It gives the Securities and Exchange Commission power to discipline ratings agencies if they're reckless.
There is some give, too The Federal Reserve, an institution Wall Street perceives as weak, will bear the lion's share of regulatory duties including housing a consumer financial protection agency -- much to the chagrin of reformers who wanted a stand-alone independent organization.
Dodd is also proposing a systemic risk council of regulators, a resolution authority and a $50 billion fund to pay for future bailouts. The bill also defines the roles of the main banking regulators: the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Good ideas, but relatively ho-hum proposals in Washington's current climate.
Big banks won't like Dodd's version of financial reform -- bank stocks sunk on the news -- they don't like anything that crimps their style. But don't be distracted by the gnashing of teeth, the industry can live with it.
"The point of this reform bill is not to punish the financial services industry," Dodd said.
Senator Chris Dodd is trying to push through financial regulation with an eye on consumer protection. Unlike the health-care bill, there is expected to be less partisanship, the News Hub panel reports.
Dodd's bill lacks punishment, but it makes up for it in passion. Everything about this plan appears to be built on giving Christopher Dodd a legacy that isn't based on three decades of deregulation and mistakes. The reform bill has enough concessions to have a shot at passage. And Dodd seems to be on a crusade to get it done.
"Every day that we delay, is a day we are unprepared for what's around the corner," Dodd said. See WSJ interview with Dodd.
Tapping the Fed as the main regulator will irk Republicans who see the central bank as getting too powerful, but the Fed will also be restructured to have greater accountability. The Fed will also see the roster of banks it overseas shrink from about 5,000 to about 35 institutions, and the president will have more power to pick Fed officials, including the head of the New York Fed and the consumer protection agency.
Having that agency under the Fed, however, is a big concession. Elizabeth Warren, who heads the congressional oversight committee for TARP, has argued that the agency must be independent and have teeth. Dodd seems to be placating critics across the aisle who say a CFPA is overkill.
The "agency will be totally hamstrung by the very agencies that failed to prevent this crisis in the first place," said John Taylor, chief executive of the National Community Reinvestment Coalition.
Beyond that, Dodd drew a line. He could have further softened opposition in Congress by abandoning Volcker. Republicans on the Senate Banking Committee have lobbied hard against the rule, saying it will put U.S. banks at a competitive disadvantage against global competition.
The rule must be approved and implemented by a new super committee of regulators, but if the bill holds up, we'll see if London, Zurich and Paris become financial centers now that Bank of America Corp. /quotes/comstock/13*!bac/quotes/nls/bac (BAC 16.99, +0.14, +0.83%) , Citigroup Inc. /quotes/comstock/13*!c/quotes/nls/c (C 4.03, +0.14, +3.60%) and J.P. Morgan Chase & Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 42.92, -0.15, -0.35%) can't risk their capital on big proprietary bets and finance big hedge funds.
Dodd's proposal quashes the notion that flawed reform is better than no reform at all. Compared to the alternatives presented by Republicans such as Sens. Richard Shelby, R- Ala., and Bob Corker, R-Tenn., Dodd comes off looking more like Brooksley Born than a senator selling out the public in the interest of passing something -- anything.
The senator's urgency and willingness to cut Republicans out of the process comes at a pivotal time. We're nearing the second anniversary of the emergency sale of Bear Stearns Cos. to J.P. Morgan. The credit-default swap market is out there ticking like a time bomb. Wall Street and big banks are running unfettered. Risk is making a comeback. The European Union's struggle with Greece should serve as a reminder as to how necessary regulation and a plan for troubled institutions are.
Now, Congress must summon the fortitude to pass the bill: a tall order with elections looming this fall, and Wall Street a source of finance and support. Dodd isn't running, of course, and that's lucky for us. He has decided he doesn't want his legacy to be the credit crisis and Great Recession.
Let's hope he speaks for a generation in Congress.
David Weidner covers Wall Street for MarketWatch.
- brothers22 | 8:53 a.m. Today8:53 a.m. March 16, 2010
Tiger Woods' return to golf -- at the Masters, no less -- will generate the biggest television ratings of the year. What about the Super Bowl? Forget about it.
11:37 a.m. Today11:37 a.m. March 16, 2010 | Comments: 56
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