Dodd's reform plan takes aim at the Fed
Curbs on central bank are at odds with administration's vision

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."

Dodd said he had worked closely with both the administration and Rep. Barney Frank (D-Mass.), who leads the House Financial Services Committee and has developed legislation more in line with the Treasury Department's original proposal.

"To the extent you can develop consensus, it's very important," Dodd said. "This is not about ego. It's about putting together an architecture that makes sense, and it's long overdue."

The significant differences among the Senate, House and administration plans could reduce the chances that Congress can complete work on financial reform by year's end as Democratic leaders have sought, financial analysts said. Dodd said he hopes to begin the process of approving his bill in early December.

Senate Democrats on the banking committee said Dodd has shown flexibility on several elements of his massive 1,136-page bill. He allowed other lawmakers to influence major portions of it in an effort to present a united front at the news conference where the legislation was rolled out. Dodd, for instance, bowed to Schumer's requests that the bill give shareholders more say over executive compensation and allow the Securities and Exchange Commission to receive more funding by financing itself through registration fees paid by companies.

In response to the regulatory proposals taking shape in recent months, Fed Chairman Ben S. Bernanke has offered little resistance to proposals that the Fed cede its responsibility for protecting consumers to a new agency. But Bernanke views the Fed's role in supervising banks as core to its mission and has pressed that point with lawmakers. In a congressional hearing last month, he said the Fed's regulatory duties are crucial if it is to have the information, expertise and authority to promote the stability of the financial system and carry out effective monetary policy.

Bernanke himself is held in generally high regard by Congress and is likely to be confirmed for a second term as chairman in the coming months.

But the Fed of late has had relatively little success swaying congressional debates. It has few lobbyists of its own, and Bernanke's interactions with Congress tend to be more professorial than backroom dealing. And he is cautious about public statements, only recently taking his arguments to the public on television.

Other financial regulators, particularly Federal Deposit Insurance Corp. Chairman Sheila C. Bair, have been more adept at building support for their agencies on Capitol Hill.

Staff writer Binyamin Appelbaum contributed to this report.

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