Dodd's reform plan takes aim at the Fed

By David Cho, Brady Dennis and Neil Irwin
Washington Post Staff Writer
Wednesday, November 11, 2009

The chairman of the Senate Banking Committee on Tuesday unveiled a sweeping regulatory reform bill that would strip the Federal Reserve of nearly all of its power to oversee banks, setting up a possible clash with the Obama administration, which has argued for the central bank to play a pivotal role in addressing financial threats.

The legislation promoted by Sen. Christopher J. Dodd (D-Conn.) would impose the most fundamental change in the Fed's mission since the Great Depression, leaving it responsible for little besides setting monetary policy. Senior administration officials and Fed leaders, by contrast, have urged that the central bank retain its power to oversee large and complex financial firms whose collapse could endanger the global system.

Dodd's bill not only abandons the proposal that the Fed take the role of regulating potential risk to the financial system, but it also would remove the Fed's responsibilities for overseeing consumer protection and bank regulation.

"We saw over the last number of years when they took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure," Dodd said.

If he can persuade a majority of Senate Democrats to sign on to his proposal, his vision for regulatory reform could prove tough to derail. While the House is also considering a bill on financial regulation, the Senate debate could be decisive because its final version would be more difficult to change given the challenge of garnering the necessary votes there.

The legislation reflects the wide disdain for the Fed held by many on Capitol Hill and in the public. Often faulted by critics as too powerful and largely unaccountable to lawmakers, the central bank's standing deteriorated in recent years as it failed to foresee, much less prevent, the financial crisis. Its massive bailout of American International Group and other financial firms has also been unpopular with many in Congress, who see these actions as proof that the Fed is beholden to big banks.

"When it comes to systemic risk and things like that, the Fed knows these markets better than anyone else," said Sen. Charles E. Schumer (D-N.Y.), another member of the Banking Committee. But he added, "Whether rightfully or wrongly, [the Fed] is highly unpopular with the left and the right."

Fed leaders have previously argued that they need to regulate banks as part of their mission to guide the overall economy, and they defend actions taken during the financial crisis as necessary to avert a far worse recession. But while the Fed could now be headed into a battle with key senators, central bank officials avoided an open conflict Tuesday as a spokeswoman said only that the central bank is reviewing Dodd's proposal.

With few champions among lawmakers, the Fed may now have to depend on its allies in the administration, which finds itself in an awkward position, congressional sources said. Obama's top economic officials, who argued for months that the system for regulating financial markets needed a major overhaul, now see an effort in the Senate that is more ambitious.

"Dodd is basically starting out by out-reforming the administration," said a senior congressional staff member, who spoke on the condition of anonymity because he was not authorized to comment.

Administration officials are taking a long view, aware that legislating such major changes would involve many twists and turns before they're finally adopted. The officials also noted that the bill is similar to the administration's plan in significant ways, such as imposing tough new capital standards on banks, punishing big financial firms for reckless behavior and creating a new agency to protect consumers of mortgages, credit cards and other financial products.

"Chairman Dodd's draft bill moves us one step closer toward comprehensive financial reform," Treasury Secretary Timothy F. Geithner said. "We look forward to working with the chairman and his committee in the coming weeks on a set of strong reforms to strengthen consumer protection, crack down on excessive risk-taking, and stabilize the financial system while protecting the taxpayer."

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