Ambitious bills could remake financial regulatory landscape

With each vote, lawmakers step closer to rewriting the rules

As lawmakers on Capitol Hill inch closer toward overhauling the nation's fractured financial regulatory system, each hour of debate, each tweak of legal language, each tedious roll call carries the potential to generate colossal changes in the relationship between Washington and Wall Street.

One proposal, spearheaded by Rep. Ron Paul (R-Tex.) would usher in unprecedented scrutiny of the Federal Reserve by allowing auditors to examine every aspect of the central bank's actions. That measure could come to a vote in the House Financial Services Committee on Thursday, though its prospects for success remain uncertain.

Another provision, pushed by Rep. Paul E. Kanjorski (D-Pa.), would empower federal regulators to dismantle financial firms before they grow so large that their failure could endanger the entire financial system -- even if those firms appear to be healthy and well-capitalized.

The proposals are among scores of ideas floated on bill after bill in recent months. Thus far, Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, has steered his version of financial reform through that legislative minefield, navigating past Republican opposition, unrelenting pressure from industry lobbyists and consumer advocates, and occasional discord among some Democrats -- all while trying to emerge with a bill that can both pass the entire House and still resemble the original blueprint.

He is moving closer to that goal.

Frank's committee so far has approved legislation to create a new agency to oversee mortgages, credit cards and other loans to consumers, as well as measures to oversee the largely unregulated derivatives market, improve investor protections and impose stricter rules on credit-ratings agencies.

Each issue required noteworthy concessions, always with the endgame in mind.

"What he needs are the votes to pass this," Frank's spokesman, Steve Adamske, said of the legislative calculus. "How do you get the votes?"

On the new consumer agency, for example, Frank got the votes in part by allowing exemptions for community banks, automakers and various non-financial businesses in order to shore up support for the larger goal of creating the new watchdog.

He has made similar allowances in the current debate over a bill aimed at preventing a repeat of last fall's bailouts of financial giants such as American International Group and Citigroup, when officials believed that their only options were to save the firms with taxpayer dollars or allow them to collapse into bankruptcy.

Frank has agreed to change his initial view and support a proposal that would require financial companies to pay ahead of time into a fund that the government could use to wind down large, troubled financial firms.

On Wednesday, he backed Kanjorski's amendment granting the government power to break up even healthy firms if they pose systemic risks. Under the plan, if regulators determine that a firm poses systemic risks, regulators could act preemptively to limit its size and scope, as well as its risk levels and links to other firms. They could take a variety of actions, including changing existing regulatory standards, limiting mergers and acquisitions and -- in the most extreme cases -- breaking up a company.