Dodd Bill Would Allow Fed To Hide Its Spending

Dodd Bill Would Allow Fed To Hide Its Spending
Ryan Grim, Huffington Post

The Wall Street reform bill headed for a test vote on the Senate floor Monday night will allow the Federal Reserve to continue to pump trillions of dollars into major banks largely in secrecy, the co-author of House language that would open the central bank to an audit charged in a memo to the Senate.

"The Senate has a provision in its reform bill that purports to audit the Fed. But, it really doesn't do anything of the sort. I'm going to run down the details for you, and reprint the legislative language so you can read it yourself," writes Rep. Alan Grayson (D-Fla.).

It would not allow the GAO to look into the Fed's massive purchase of toxic assets, its hundreds of billions in foreign currency swaps with other central banks or its open market operations, among other restrictions.

Grayson and co-author Rep. Ron Paul (R-Texas) passed legislation through the House that would allow the Government Accountability Office (GAO) to audit the Federal Reserve and, after a delay, release the information to Congress. It was a remarkable victory, with a populist coalition beating back the combined lobbying efforts of the Treasury Department, the Fed and Wall Street banks.

The Senate has been more hostile territory for the Fed audit provision. Banking Committee Chairman Chris Dodd (D-Conn.) opposes the Grayson-Paul version, but allowed a much more restrictive audit proposal from Sen. Jeff Merkley (D-Oregon) into his bill.

Grayson, in his memo, outlines the shortcomings of the Senate bill. Walker Todd, who spent some 20 years as a counselor with the Federal Reserve Banks of New York and Cleveland, reviewed Grayson's analysis and told HuffPost he concurs with it.

The Seante bill would allow an audit of the  TALF program and slightly expands authority to audit emergency lending conducted under section 13(3) of the Federal Reserve Act, but restricts it to very specific purposes.

Meanwhile, it would not allow the GAO to look into the Fed's massive purchase of toxic assets, its hundreds of billions in foreign currency swaps with other central banks or its open market operations, among other restrictions.

Fed backers argue that requiring transparency would politicize monetary policy, though monetary policy and the Fed itself are already political -- they regularly lobby Congress, after all -- and would tempt lawmakers to pressure the Fed to inflate the currency to reduce the debt burden.

Merkley said he agrees with Grayson's analysis. "I appreciate Representative Grayson's concerns over accountability at the Federal Reserve. I have been a strong proponent of Fed reform and voted against the re-confirmation of Ben Bernanke because the Fed has been so lax in using its regulatory powers," Merkley said in a statement to HuffPost.

"Moreover, I felt strongly that we need to act now to empower the GAO to audit the extraordinary emergency programs created by the Fed and I succeeded in getting that power into the Senate bill. Rep. Grayson points out, fairly in my mind, that we need to go even further to audit the Fed's standing programs. I agree. While we need to protect the Fed's independence to implement monetary policy, I think the structure and use of their standard programs should be transparent."

Sen. Bernie Sanders (I-Vt.) intends to introduce an amendment on the floor effectively adding the Grayson-Paul language to the Senate bill. The language is hereand below is a summary from his office of the amendment:

Support the Sanders Federal Reserve Transparency Amendment to the Financial Reform Bill

The American people have a right to know who received over $2 Trillion in financial assistance from the Federal Reserve.

Since the beginning of the financial crisis, the Federal Reserve has provided over $2 trillion in taxpayer-backed loans and other financial assistance to some of the largest financial institutions and corporations in the world. Unfortunately, the Fed is still refusing to tell the American people or the Congress who received most of this assistance, how much they received or what they are doing with this money. This money does not belong to the Federal Reserve, it belongs to the American people, and the American people have a right to know where their taxpayer dollars are going.

Therefore, during the consideration of the financial reform bill, we will offer an amendment to increase transparency at the Federal Reserve. Specifically, our amendment:

* Requires the non-partisan Government Accountability Office (GAO) to conduct an independent and comprehensive audit of the Federal Reserve within one year after the date of enactment of the financial reform bill;

* Requires the GAO to submit a report to Congress detailing its findings and conclusion of their independent audit of the Fed within 3 months; and

* Requires the Federal Reserve within one month after the date of enactment to disclose the names of the financial institutions and foreign central banks that received financial assistance from the Fed since the start of the recession, how much they received, and the exact terms of this taxpayer assistance.

* Does not interfere with or dictate the monetary policies or decisions of the Federal Reserve.

59 Senators, 320 Members of Congress, and two federal courts have called on the Federal Reserve to become more transparent.

Our amendment is similar to an amendment that was offered to last year's Budget Resolution that passed the Senate on a bi-partisan vote of 59-39 on April 1, 2009; S.604, the Federal Reserve Sunshine Act that now has 33 bi-partisan co-sponsors; and the Federal Reserve Transparency Act (H.R. 1207) that has 320 bi-partisan co-sponsors (a version of which passed the House Financial Services Committee by a vote of 43-28 and was incorporated into the financial reform bill that passed the House last December).

In August of 2009, the United States District Court for the Southern District of New York also ordered the Fed to disclose the recipients of this taxpayer assistance as a result of a Freedom of Information Act lawsuit filed by Bloomberg News. This decision was upheld by the U.S. Court of Appeals in Manhattan on March 19, 2010.

The Senate Financial Reform Bill does not do enough to make the Fed more transparent.

While the Senate financial reform bill attempts to address the lack of transparency at the Fed, as currently drafted, much of the information regarding the details of who received this financial assistance could be kept secret forever.

As long as the Federal Reserve is allowed to keep the information on their loans secret, we may never know the true financial condition of the banking system. The lack of transparency at the Fed could lead to an even bigger crisis in the future.

We now know that the lack of transparency in credit default swaps led to the $182 billion taxpayer bailout of AIG; the collapse of Lehman Brothers and precipitated the worst financial crisis since the Great Depression.

We know who received TARP funding.

Anyone with access to the internet can go onto the Treasury Department's website and find out exactly who received a bail-out from the $700 billion TARP program. The American people have a right to know the same information from the Fed.

The Sanders Amendment does not undermine the Fed's independence.

This amendment does not take away the "independence" of the Fed and it does not put monetary policy into the hands of Congress.

This amendment does not tell the Federal Reserve when to cut short-term interest rates or when to raise them. It does not tell the Federal Reserve what banks to lend money to and what banks not to lend money to. It does not tell the Federal Reserve what foreign central banks they can do business with and which ones it cannot do business with. It does not impose any new regulations on the Federal Reserve nor does it take any regulatory authority away from the Fed.

This amendment simply requires the GAO to conduct an independent audit of the Fed and requires the Fed to release the names of the recipients of more than $2 trillion in taxpayer-backed assistance.

For nearly nine decades, the GAO has a proven track record of conducting objective, fact-based, nonpartisan, non-ideological, fair, and balanced audits. Through these audits, the GAO helped save the American taxpayers $50 billion last year alone by rooting out waste, fraud, and abuse in the federal government.

Let's not equate independence with secrecy. We cannot let the Fed operate in secrecy any longer. There is simply too much money at stake.

Read Grayson's memo, followed by the legislative language:

Memo to the Senate: Stop Secret Bailouts by the Fed

Sometimes, you just know that you've struck a nerve. I knew it early last year, when a clip of my questioning the Inspector General of the Federal Reserve over the Fed's balance sheet became the most viewed Congressional hearing in YouTube history. The Fed had lent out around $1 trillion, and I wanted to know what happened to the people's money. So did the people.


They were angry at the Fed, and they showed it. And because of that righteous anger, the financial reform bill in the House contains a provision to audit the Federal Reserve fully. If it passes the Senate, we will finally know to whom the Fed lent our money, how much, and what little we got in return.


So it's up to the Senate. The Senate has a provision in its reform bill that purports to audit the Fed. But, it really doesn't do anything of the sort. I'm going to run down the details for you, and reprint the legislative language so you can read it yourself. But the story is simple; if the House version of a Fed audit passes, we will finally know to whom the Fed lent our money. If the Senate version passes, the Fed can continue to make sweetheart loans to whomever it wants, without telling Congress or the public.


The way Congress oversees complicated government agencies is through the Congressional audit arm, the Government Accountability Office (GAO). The GAO does the actual auditing, and gives that information to Congress, which then holds hearings and makes policy. The House bill grants the GAO the authority to audit the Fed, and then releases that information to Congress with a six-month delay, to prevent traders from gaming the system.


The Senate version only allows the GAO to audit a certain part of the Federal Reserve, its emergency lending facilities. The GAO already has some of that authority. Amazingly, the Senate version forces the GAO to withhold this information from the public, and Congress, for as long as the Federal Reserve chooses.


The details, and the specific legislative language, are below.


Limited Audit Authority


What the Senate bill allows:

- The Senate language slightly expands existing authority to the GAO to audit only the emergency lending authority in section 13(3) of the Federal Reserve Act, but only for specific purposes.


- The Senate language would grant the GAO authority to audit the TALF program.

What the bill does NOT allow:

- The Senate language does not allow audits of the mortgage backed security purchase program, a $1.25 trillion program that at this point comprises the bulk of the Fed's balance sheet. This program includes Freddie and Fannie backed debt.


- The Senate language does not allow audits of possible losses on foreign currency swap lines, of which there were more than $500 billion at the height of the crisis. This includes unlimited credit lines granted to central banks all over the world, solely through at the discretion of Federal Reserve and without the input of any elected official or the State Department.


- The Senate language does not allow audits of open market operations, where there is ample room for errors, market manipulation, and insider trading violations.


- The Senate language does not allow audits of possible losses on securities acquired through non-section 13(3) facilities. This includes looking for possible losses, seigniorage, political conflicts and costs to the Treasury.

Federal Reserve Secrecy

- In the Senate version, all audits must remain redacted. The GAO can't even tell Congress to whom the Fed is lending money, the amounts it is lending, or any details about collateral or assets held in connection with any credit facility.


- The GAO can never release a full version of any audit unless the Federal Reserve first chooses to shut down the audited credit facility.


- Once the Federal Reserve shuts down the authority for the credit facility, the GAO still has to wait a year before it can release details about that facility. If the Fed simply chooses to stop making loans, but does not eliminate the authority to make loans, the GAO has to wait three years before it can release a full report. The Fed can at any point during this period choose to restart the facility, and thereby prevent the release of a full report.

See for yourself. The legislative language in the Senate draft is here.


Sec. 714. Audit of Financial Institutions Examination Council,


Federal Reserve Board, Federal Reserve banks, Federal Deposit Insurance Corporation, and Office of Comptroller of the Currency

(a) In this section, "agency" means the Financial Institutions Examination Council, the Board of Governors of the Federal Reserve System (in this section referred to as the `Board'), Federal Reserve Banks, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.

(b) Under regulations of the Comptroller General, the Comptroller General shall audit an agency, but may carry out an onsite examination of an open insured bank or bank holding company only if the appropriate agency has consented in writing. Audits of the Board and Federal reserve banks may not include -

   (1) transactions for or with a foreign central bank, government of a foreign country, or non-private international financing organization;

   (2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;

   (3) transactions made under the direction of the Federal Open Market Committee; or

   (4) a part of a discussion or communication among or between members of the Board and officers and employees of the Federal Reserve System related to clauses (1)-(3) of this subsection.

(c)(1) Except as provided in this subsection, an officer or employee of the Government Accountability Office may not disclose information identifying an open bank, an open bank holding company, or a customer of an open or closed bank or bank holding company. The Comptroller General may disclose information related to the affairs of a closed bank or closed bank holding company identifying a customer of the closed bank or closed bank holding company only if the Comptroller General believes the customer had a controlling influence in the management of the closed bank or closed bank holding company or was related to or affiliated with a person or group having a controlling influence.

   (2) An officer or employee of the Office may discuss a customer, bank, or bank holding company with an official of an agency and may report an apparent criminal violation to an appropriate law enforcement authority of the United States Government or a State.

   (3) Except as provided under paragraph (4), an officer or employee of the Government Accountability Office may not disclose to any person outside the Government Accountability Office information obtained in audits or examinations conducted under subsection (e) and maintained as confidential by the Board or the Federal Reserve banks.

   (4) This subsection shall not--

      (A) authorize an officer or employee of an agency to withhold information from any committee or subcommittee of jurisdiction of Congress, or any member of such committee or subcommittee; or

      (B) limit any disclosure by the Government Accountability Office to any committee or subcommittee of jurisdiction of Congress, or any member of such committee or subcommittee.

      (d)(1) To carry out this section, all records and property of or used by an agency, including samples of reports of examinations of a bank or bank holding company the Comptroller General considers statistically meaningful and workpapers and correspondence related to the reports shall be made available to the Comptroller General. The Comptroller General shall have access to the officers, employees, contractors, and other agents and representatives of an agency and any entity established by an agency at any reasonable time as the Comptroller General may request. The Comptroller General may make and retain copies of such books, accounts, and other records as the Comptroller General determines appropriate. The Comptroller General shall give an agency a current list of officers and employees to whom, with proper identification, records and property may be made available, and who may make notes or copies necessary to carry out an audit.

      (2) The Comptroller General shall prevent unauthorized access to Records, copies of any Record, or property of or used by an agency that the Comptroller General obtains during an audit.

      (3)(A) For purposes of conducting audits and examinations under subsection (e), the Comptroller General shall have access, upon request, to any information, data, schedules, books, accounts, financial records, reports, files, electronic communications, or other papers, things or property belonging to or in use by--

      "(i) any entity established by any action taken by the Board described under subsection (e);

      "(ii) any entity receiving assistance from any action taken by the Board described under subsection (e), to the extent that the access and request relates to that assistance; and

      (iii) the officers, directors, employees, independent public accountants, financial advisors and any and all representatives of any entity described under clause (i) or (ii); to the extent that the access and request relates to that assistance;

      (B) The Comptroller General shall have access as provided under subparagraph (A) at such time as the Comptroller General may request.

      (C) Each contract, term sheet, or other agreement between the Board or any Federal reserve bank (or any entity established by the Board or any Federal reserve bank) and an entity receiving assistance from any action taken by the Board described under subsection (e) shall provide for access by the Comptroller General in accordance with this paragraph.

      (e) Notwithstanding subsection (b), the Comptroller General may conduct audits, including onsite examinations when the Comptroller General determines such audits and examinations are appropriate, of any action taken by the Board under the third undesignated paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 343); with respect to a single and specific partnership or corporation.'

      (f) REVIEWS OF CREDIT FACILITIES OF THE FEDERAL RESERVE SYSTEM.--

      (1) DEFINITION.--In this subsection, the term 'credit facility' means any utility, facility, or program authorized by the Board of Governors of the Federal Reserve System under the third undesignated paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 343), including any special purpose vehicle or other entity established by or on behalf of the Board of Governors or a Federal reserve bank, that is not subject to audit under subsection (e), including--

      (A) the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility;

      (B) the Term Asset-Backed Securities Loan Facility;

      (C) the Primary Dealer Credit Facility;

      (D) the Commercial Paper Funding Facility; and

      (E) the Term Securities Lending Facility.

      (2) AUTHORITY FOR REVIEWS AND EXAMINATIONS.--Subject to paragraph (3), and notwithstanding any limitation in subsection (b) on the auditing and oversight of certain functions of the Board of Governors of the Federal Reserve System or any Federal reserve bank, the Comptroller General of the United States may conduct reviews, including onsite examinations, of the Board of Governors, a Federal reserve bank, or a credit facility, if the Comptroller General determines that such reviews are appropriate, solely for the purposes of assessing, with respect to a credit facility--

       (A) the operational integrity, accounting, financial reporting, and internal controls of the credit facility;

      (B) the effectiveness of the collateral policies established for the facility in mitigating risk to the relevant Federal reserve bank and taxpayers;

      (C) whether the credit facility inappropriately favors one or more specific participants over other institutions eligible to utilize the facility; and

      (D) the policies governing the use, selection, or payment of third-party contractors by or for any credit facility.

      (3) REPORTS AND DELAYED DISCLOSURE.--

      (A) REPORTS REQUIRED.--A report on each review conducted under paragraph shall be submitted by the Comptroller General to the Congress before the end of the 90-day period beginning on the date on which such review is completed.

      (B) CONTENTS.--The report under subparagraph (A) shall include a detailed description of the findings and conclusions of the Comptroller General with respect to the matters described in paragraph (2) that were reviewed and are the subject of the report, together with such recommendations for legislative or administrative action relating to such matters as the Comptroller General may determine to be appropriate.

      (C) DELAYED RELEASE OF CERTAIN INFORMATION.--

      (i) IN GENERAL.--The Comptroller General shall not disclose to any person or entity, including to Congress, the names or identifying details of specific participants in any credit facility, the amounts borrowed by specific participants in any credit facility, or identifying details regarding assets or collateral held by, under, or in connection with any credit facility, and any report provided under subparagraph (A) shall be redacted to ensure that such names and details are not disclosed.

      (ii) DELAYED RELEASE.--The non-disclosure obligation under clause (i) shall expire with respect to any participant on the date on which the Board of Governors, directly or through a Federal reserve bank, publicly discloses the identity of the subject participant or the identifying details of the subject assets or collateral.

      (iii) GENERAL RELEASE.--The Comptroller General shall release a non redacted version of any report on a credit facility 1 year after the effective date of the termination by the Board of Governors of the authorization for the credit facility. For purposes of this clause, a credit facility shall be deemed to have terminated 24 months after the date on which the credit facility ceases to make extensions of credit and loans, unless the credit facility is otherwise terminated by the Board of Governors.

      (iv) EXCEPTIONS.--The nondisclosure obligation under clause (i) shall not apply to the credit facilities Maiden Lane, Maiden Lane II, and Maiden Lane III.

Re-Regulating the Market

Does Obama's Plan Go Far Enough?
By BINOY KAMPMARK

President Barack Obama has become the chief sales officer for market regulation, a theme he has been labouring over for some time. Cooper Union, its location pitched within a few miles of Wall Street, doesn’t seem to be tiring of luminaries with their addresses of various gravity and significance.

The proposed regulations, at least on paper, look far reaching. A body would be created to detect financial threats. The Financial Product Safety Commission has the potential to be an effective institution. Consumer rights would be enhanced, and banks would be wise to adhere to their safety. The more bad loans, the greater the instability of the system as a whole. The Agriculture Committee legislation bars banks from trading in derivative instruments and forging deals with other clients, thereby subverting speculation. The Banking Committee, however, disallows speculative trades with their own accounts, though its bill proves more lenient on banks in terms of setting up derivative arrangements for clients.

But a thought, to carry weight, must surely be believed and acted upon by the person advocating it. Joseph E. Stiglitz was correct to point out that the regulatory system (if one can call it that) failed ‘partly because we had regulators who didn’t believe in regulation’ (Politico, Apr 12). For that reason, a wary eye should be kept on the Federal Reserve, that less than impressive body that did so little to halt the slide to economic ruin.

There was nothing new in this particular stage show by the President. The message was familiar – Wall Street and Main Street again make their appearances, jostling for poll position in the American imagination. Business America, seen as innovative yet reckless and unruly; and struggling, ‘common’ America, battered by financial ruin. The consensus-driven politician calls the tune for unity, an arrangement of mutual wealth production: the boardroom managers on one side; the rest of America on the other, both shaking hands in improving the lot of USA Inc. America must produce more and consume less. Make money, and yes, oodles of it – but do it with a sense of corporate responsibility.

Obama’s desire to constrain the habits of a profligate and ruthless Gekko may be one thing; how he seeks to implement it may be quite another. America is a business nation narcotised by the illusion of ‘free markets’. (When in history have markets been truly ‘free’ is hard to say.) There remain strong swathes of the population (and Congress) suspicious about a burgeoning government.

For that reason, selling such ideas as the proposed Volcker Rule will be like selling the viability of amputation to a suffering patient. Limiting bank size and the proprietary risks they can dabble has been and will continue be a formidable sell. Social-Darwinian impulses continue to be rife, and these are hardly going to go away. The Republicans are peddling a curious idea that their opposite numbers endorse, without qualification, the idea of a colossal fund designed to bail out ailing banks. The Democrats will just have to show how the Republican drive for reform in this regard is virtually non-existent. Wall Street is short of friends, and is hoping to find them in the GOP. What is needed is a good shot of populism.

The risk for Obama now is not a fear that nothing will be done, but too little. How derivatives are dealt with, or how consumer protection is hammered out in the final product, will continue to bother the policy makers. Teeth will have to be inserted into public authority. Banker and financiers must be made to feel that prudence will be looked upon favourably; and profligacy condemned and punished. Excessive growth in bank liabilities might not always be easy to gauge, as Paul Volcker has admitted, but like ‘pornography, you know it when you see it’ (WSJ, Feb 4).

The armies of lobbyists representing the interests of Wall Street will be hoping that Congress spends time halting the momentum for change. If the economy improves, the desire for reform will subside. There are few chances of that happening thus far and the administration will have to continue making hay while the sun of reform shines.

Financial Reform Bids Collapse Into Farce

As Rahm Eyes Exit

By ANDREW COCKBURN

Word from the White House is that Rahm Emanuel is still fishing around for a lucrative berth in the financial industry (“money first, then the deal” he reportedly barked at a recent industry caller discussing business possibilities in the private sector) so we needn’t hold our breath too hard waiting for the administration to bring law enforcement, or even its emasculated sibling “regulation reform,” to Wall Street anytime soon. Not that the banks have ever really felt threatened, given the contemptuous ease, which I described here last December, with which they were able to gut the reform bill spawned last in the House of Representatives.

The retiring and long since neutered Senate Banking Committee Chairman Christopher Dodd has his own meek version of a financial reform program currently before the Senate, but this came pre-gutted on the issue of a Consumer Finance Protection Agency dedicated to protecting us from banker loan-sharks. Dodd’s proposed legislation consigns the putative CPFA to the bowels of the Federal Reserve, with a right of veto over any unappealing consumerist initiatives granted to a “Financial Stability Oversight Council” made up of banker-friendly regulators.

Dodd’s bill does at the moment enjoin that OTC (Over the Counter) derivatives trading be forced onto exchanges, where trades and prices will be open for all to see. But there is little prospect of that happening – certainly not as long as lawyer-lobbyist Edward J. Rosen, of Cleary, Gottlieb, is at his well-rewarded post, keeping Washington safe for the derivatives industry. (Admirers point to his masterful work ensuring that the interests of his principal clients, the Credit Default Swap Dealers Consortium, have been faithfully reflected in administration policy.)

Just to remind everyone what’s at stake here, Moody’s recently reported that the big derivatives-trading banks would simply not allow their OTC trades to be forced onto exchanges, where prices would be public, because that would eat into their profits. “Exchange-based trading could improve the efficiency of the OTC market, but this would almost necessarily be done at the expense of dealers’ currently substantial profits: JPMorgan Chase, for example, has disclosed that it generated fully a third of its overall investment banking profits from OTC derivatives in 2006-2008. Such a permanent reduction in profitability would be a credit negative,” warned the credit rating agency.

That there is even a discussion over whether or not to clean up the derivatives racket, not to mention all the other instances of crookedness that have brought us to the current ongoing catastrophe (one in every five Americans now unemployed or forced to work part time) is laughable. Further transmuting tragedy into farce is the spectacle of the Financial Crisis Inquiry Commission, supposedly bent on uncovering the causes of the meltdown. Once upon a time, investigative hearings were worthwhile spectacles. The Watergate committee, after all, had its moments, while the Pecora Commission of New Deal days probing Wall Street machinations certainly made a few swindlers squirm. But the “inquiry commission” holds out no such promise. (Once they opted for “crisis” rather than “crimes” we knew it was all over.)

Under the flaccid chairmanship of Pelosi crony Phil Angelides, the FCIC hearings have been built around empty exchanges. Angelides set the tone in the opening session, when he thanked the CEOs of Goldman Sachs, JP Morgan, Morgan Stanley and Bank of America for their “thoughtful” written statements and then went on to ask Goldman boss Lloyd Blankfein to name “the two most significant things” for which he might apologize. Try as he might, Blankfein couldn’t really think of anything very serious.

Yesterday, Angelides was at it again, letting the despicable Alan Greenspan ramble, prevaricate, and mumble his way through what felt like hours of listless testimony (some of it in the dark thanks to a power failure.) Greenspan was not even seriously challenged on his assertion that the financial markets are now so complicated that any attempt at regulation is futile, as if Lehman Brothers’ crude cooking of its books via the recently exposed “Repo 105” maneuver was anything other than straightforward fraud, or the scam of packaging worthless mortgage loans into “AAA” CDO securities and selling them to pension funds was anything other than a simple confidence trick, or that tricking poor people into extortionate loans – the basis of the housing bubble – merited anything more than a speedy trial, with stiff sentences to follow.

Senate Panel Said to Scrap Obama’s Consumer Agency

So much for that!

Senate Panel Said to Scrap Obama’s Consumer Agency
By Alison Vekshin and Robert Schmidt

March 1 (Bloomberg) -- Senate Banking Committee negotiators, working through the weekend, agreed to drop the stand-alone consumer agency sought by the Obama administration and opposed by the banking industry, removing an obstacle that has stalled new U.S. financial rules.

Committee Chairman Christopher Dodd, a Connecticut Democrat, joined panel Republicans in seeking an alternative to the Obama proposal. Both parties are still aiming for a deal on placing consumer powers within another regulator, said people with knowledge of the talks who declined to be identified because the discussions are private.

“While this presents a new set of issues for regulatory reform, it does resolve a fairly significant and sensitive one for the banking industry: a consumer financial protection agency completely de-linked from the safety-and-soundness regulators,” said Kevin Petrasic, a lawyer at Washington-based Paul, Hastings, Janofsky & Walker LLP.

The negotiations focused on President Barack Obama’s Consumer Financial Protection Agency, which stalled talks on the overhaul, with Dodd proposing a bureau in the Treasury and Senator Richard Shelby, the committee’s top Republican, suggesting such powers go to the Federal Deposit Insurance Corp. Neither proposal advanced, a Senate aide said. Talks between the two lawmakers on the bill collapsed last month.

Senator Bob Corker, a Tennessee Republican and an opponent of the independent agency who is working with Dodd on a compromise, has proposed that consumer responsibilities be assigned to the Federal Reserve, said a person familiar with the senator’s discussions.

‘Whole New Bureaucracy’

The financial-services industry opposes the consumer agency more than any other provision in Obama’s plan and has lobbied lawmakers to defeat it. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts.

“The Senate negotiators are realists,” said Gilbert Schwartz, a former Federal Reserve lawyer and partner at Schwartz & Ballen LLP in Washington. “They recognized that the CFPA was a lightning rod and the only way to get financial reform legislation through was to back away from it.”

Dodd proposed a Bureau of Financial Protection in the Treasury with power to write rules for financial-services companies, funded mainly through industry fees and headed by a director appointed by the White House, according to a two-page summary Dodd circulated during the weekend.

“I’m more concerned about what powers it has,” Dodd said in a Feb. 26 interview for Bloomberg Television’s “Political Capital With Al Hunt.”

Republican Rejection

Committee Republicans rejected Dodd’s proposal because it split consumer protection from the safety-and-soundness responsibility of bank regulators, according to a Senate aide who declined to be identified because the talks are private.

“It is important for the CFPA to be located in an agency with substantial safety-and-soundness responsibilities so that these goals work together rather than at cross purposes,” said Oliver Ireland, former Federal Reserve associate general counsel and now partner at law firm Morrison & Foerster LLP in Washington. “This probably means it should not be at Treasury.”

Shelby’s staff on Feb. 26 circulated two proposals to committee Republicans. One calls for a three-member Financial Products Consumer Protection Council with a chairman appointed by the president, the FDIC chairman and the director of a newly created federal bank regulator, according to a one-page summary obtained by Bloomberg News.

FDIC, Fed

The other would establish a consumer protection division at the FDIC to be run by a director appointed by the president with a five-member board, according to a two-page summary.

Both Republican proposals give the consumer unit the power to write rules, including banning unfair or deceptive practices, a power now held by bank regulators including the Federal Reserve. It would develop plain-English disclosures and lead all federal consumer financial literacy efforts.

Dodd rejected Shelby’s proposal, according to the Senate aide. Talks continued through the weekend, Corker spokeswoman Laura Herzog said yesterday in an e-mail.

The House in December passed a financial overhaul bill that included a stand-alone consumer agency. The agency is needed because regulators consider consumer protections “as a second thought,” House Financial Services Committee Chairman Barney Frank, the architect of the House bill, said in a Feb. 18 Bloomberg Television interview.

Webb Bonus Plan

Separately, Senator James Webb, a Virginia Democrat, plans to advance a proposal to tax bonuses for companies that received at least $5 billion in the taxpayer bailout. Webb will offer an amendment to legislation extending business and personal tax provisions that expired in 2009, said Jessica Smith, Webb’s spokeswoman.

Webb and Senator Barbara Boxer, a California Democrat, proposed a 50 percent tax on any bonuses exceeding $400,000.

The Senate last year retreated from a bill approved by the House that would have put a 90 percent tax on bonuses at firms receiving U.S. aid. The House passed the measure after retention pay for AIG employees sparked a public outcry.