By Brady Dennis
Washington Post Staff Writer
Wednesday, May 12, 2010; A10
Senate lawmakers voted unanimously Tuesday to increase oversight of the Federal Reserve, but the two parties diverged on whether a bill to rewrite financial regulations should include an overhaul of government-backed mortgage giants Fannie Mae and Freddie Mac.
The Fed amendment was submitted by Sen. Bernard Sanders (I-Vt.) and co-sponsored by colleagues on both sides of the aisle. It gives the Government Accountability Office expanded power to audit the Fed and requires the central bank to disclose details about firms that received emergency aid during the financial crisis.
"We are beginning to lift the veil of secrecy on what is perhaps the most important agency in the United States," Sanders said.
Facing pressure from the Obama administration and fellow lawmakers, Sanders agreed last week to narrow his initial proposal, which would have required the Fed to submit to regular audits.
Instead, under the legislation, the Fed must undergo a one-time examination of its massive emergency lending programs and post details on its Web site by December about the firms that benefited from its lending during the crisis. The new language, however, prevents investigators from peering into the central bank's deliberations on interest rates and other elements of monetary policy.
A Fed spokeswoman declined to comment on the Senate action, but Fed leaders, who previously have objected to broader efforts to review monetary policy, have not opposed the most recent version of Sanders's proposal.
The measure, which passed 96 to 0, is a less contentious version of legislation introduced by Rep. Ron Paul (R-Tex.) and approved overwhelmingly by the House last year. An amendment offered Tuesday by Sen. David Vitter (R-La.) that would have inserted Paul's more aggressive language verbatim was voted down 62 to 37.
Paul expressed disappointment with the Sanders amendment, writing on his Web site that "while it is better than no audit at all, it guts the spirit of a truly meaningful audit of the most crucial transactions of the Fed. In fact, rather than still calling the Sanders Amendment an audit, maybe it should instead be called more of a disclosure at this point."Mortgage giants intact
Meanwhile, in a mostly party-line vote later Tuesday, 56 to 43, Democrats defeated a GOP effort to include a provision in the financial overhaul bill to wind down the government's role in Fannie Mae and Freddie Mac.
Republican Sens. John McCain (Ariz.), Richard C. Shelby (Ala.) and Judd Gregg (N.H.) had called for the government to end its control of the firms within two years. Fannie and Freddie also would have been forced to reduce the size of their mortgage portfolios and to begin paying state and local sales taxes.
"Freddie Mac and Fannie Mae were at the heart of the financial crisis," Shelby said Tuesday. "How we can have basic regulatory reform, financial reform, if we're not going to include Fannie Mae and Freddie Mac?"
The bailout of the two companies has reached $145 billion. Over the past week, Fannie and Freddie have reported combined first-quarter losses in excess of $18 billion and requested nearly $20 billion in additional federal aid. Democratic lawmakers and administration officials have resisted efforts to close down the companies, warning that they play a vital role in supporting the housing market and that hasty action to restructure them could endanger the wider economy.
On Tuesday, the architect of the financial overhaul bill, Sen. Christopher J. Dodd (D-Conn.), continued to criticize the GOP amendment as reckless. "That's hardly reform," Dodd said. "Don't tear down what you have before you know what you're going to replace it with."
Dodd offered a competing amendment Tuesday that would require the Treasury Department to study how to end the conservatorship of Fannie and Freddie; recommendations to Congress would be due by Jan. 31. That amendment passed 63 to 36.Financial fine-tuning
Senators also approved a provision aimed at preventing Treasury from redirecting unused bailout funds for new programs. It would also ensure that repaid funds go toward paying down the deficit. Lawmakers also began debating an amendment by Sen. Bob Corker (R-Tenn.) to include mortgage underwriting standards into the current legislation. A vote is expected Wednesday.
Other amendments could continue to shape Dodd's bill, as well as the relationship between Washington and Wall Street.
Various factions have been trying to scale back or eliminate a proposal by Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark.) that could force big banks to spin off their lucrative businesses that trade in derivatives. Critics of the provision include former Fed chairman and White House economic adviser Paul A. Volcker and Federal Deposit Insurance Corp. Chairman Sheila C. Bair. Senate Republicans have offered an amendment to strike the Lincoln provision from the current bill.
Volcker also has pushed for legislation that would ban banks from risky activities, such as owning hedge funds or private equity funds. The current Senate bill gives broad authority to regulators to decide how best to implement that notion.
Some lawmakers, however, are pressing for a more stringent "Volcker rule" that would ban banks from making speculative investments using their own capital -- an activity known as proprietary trading. It would also require that large, systemically important nonbank financial firms set aside additional capital to decrease the risks posed by speculative trades and would prohibit firms such as Goldman Sachs from betting against the securities it sells to clients. The effort has been vigorously opposed by Wall Street.
A bevy of smaller or less contentious issues could be resolved in a large "manager's amendment" that Dodd plans to introduce in coming days. Dodd said Tuesday that he had sent proposed language for the amendment to Shelby over the weekend but had not gotten feedback. Shelby said he was still reviewing the proposal to see where Republicans could agree.
Senate Majority Leader Harry M. Reid (D-Nev.) said he hopes to pass the far-reaching legislation this week but acknowledged that a final vote could come later.