By Brady Dennis
Washington Post Staff Writer
Friday, May 7, 2010; A22
The effort to overhaul the nation's financial regulations cleared a crucial hurdle Thursday in the Senate, a signal that the landmark legislation, long stalled by filibuster threats and partisan standoffs, could be on the fast track toward passage.
During a long day of debate that stretched into night, Senate Democrats blocked a GOP attempt to rein in the size and scope of a consumer regulator designed to protect borrowers from abuses by lenders. The 61 to 38 vote included support from two key Republicans -- Charles E. Grassley of Iowa and Olympia J. Snowe of Maine -- who Democrats hope will support the broader overhaul bill.
Late Thursday, senators also defeated an amendment, authored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.) and dreaded by Wall Street, that would have broken up the nation's biggest banks. The measure, which would have set firm limits on the size and riskiness of financial firms, went well beyond similar proposals from the White House and other Democratic leaders.
"When a few megabanks dominate our financial system, the downfall of any of them can mark the downfall of our entire economy," Brown said on the Senate floor Tuesday night as the vote neared. "Too big to fail is too big."
An unusual cross-section of senators agreed, ranging from staunch conserative Tom Coburn (R-Okla.) to outspoken liberal Al Franken (D-Minn.). Still the measure failed in a in a 61 to 33 vote that wrapped up just after 9 p.m.
Meanwhile, lawmakers appear set to approve a measure by Sen. Bernie Sanders (I-Vt.) to expand the Government Accountability Office's power to audit the Federal Reserve and to compel the central bank to disclose details about the firms that received emergency aid during the financial crisis. A vote was delayed late Thursday but likely will come next week.
Sanders's measure reflects legislation introduced by Rep. Ron Paul (R-Tex.) and approved overwhelmingly by the House last year. The effort has drawn populist support from across the political spectrum.
Banking committee chairman Sen. Christopher J. Dodd (D-Conn.), the architect of the 1,400-page financial bill, called Thursday's rejection of the GOP consumer protection proposal the most important step so far in the fight over new regulations. The two parties have long wrestled over the appropriate role for a consumer watchdog, and Democrats considered the support of Snowe and Grassley a coup.Broad powers
Dodd's bill would create an independent bureau, housed within the Federal Reserve, with the power to write and enforce rules protecting consumers of mortgages, credit cards and other loans from abusive and predatory practices. It would have a dedicated budget and an independent leader appointed by the president. A council of other regulators could veto rules put forward by the new agency, but only by a two-thirds vote.
Republicans, along with numerous business and banking groups, have staunchly opposed the new regulator, calling it a vast government overreach. They insist it would increase consumer costs, stifle financial innovation and burden smaller businesses with additional regulation.
"Why on earth would we want to punish them for the reckless behavior we saw on Wall Street?" Minority Leader Mitch McConnell (Ky.) said Thursday.
The Republican alternative would have created a consumer protection division within the Federal Deposit Insurance Corp. It would have focused primarily on large mortgage originators and other big financial firms, and any rules it created would have to win approval from the agency's board of directors. The proposal also would have kept in place the doctrine of preemption, which has allowed big banks to answer solely to federal regulators.
Ahead of Thursday's vote on the measure, President Obama excoriated Republicans for trying to "gut consumer protections" and vowed that he would "not allow amendments like this one written by Wall Street's lobbyists to pass for reform." He and other Democrats called the GOP proposal "worse than the status quo."Sanders curtails proposal
At the same time, Sanders' push to expand transparency at the Fed had gained momentum in recent days, even as Bernanke and other administration officials expressed caution. A top Treasury official said Thursday afternoon that the administration would oppose the amendment as written, and Bernanke warned that it could threaten the Fed's independence on monetary policy, possibly hindering economic stability and job creation.
"At a time when our entire financial system almost collapsed, we cannot let the Fed operate in secrecy any longer," Sanders insisted Thursday.
Ultimately, he altered his amendment in an effort to assuage those concerns. The modified language would limit GAO investigators to a single audit of the Fed's emergency lending programs since Dec. 1, 2007, eliminating the possibility of repeated audits. In addition, Sanders would give Fed officials more time to disclose details about the central bank's role in the bailout of Wall Street firms at the height of the financial crisis, moving the deadline back to December.
The changes softened opposition to Sanders' measure, and by late Thursday Dodd and the administration offered support for the modified amendment.
The Senate also began consideration of a Republican amendment seeking to dissolve the government conservatorship of mortgage giants Fannie Mae and Freddie Mac. The Dodd legislation doesn't deal with Fannie and Freddie, though administration officials have said they plan to tackle the problem over the coming year. Sen. John McCain (R-Ariz.) said on the Senate floor Thursday that trying to reform the financial system without fixing Fannie and Freddie "is like declaring war on terror and ignoring al-Qaeda."
The Senate will continue to debate the massive financial bill Friday, but no further votes are expected until Tuesday.