President Barack Obama, left, stands with Sen. Chris Dodd, D-Conn., center, and Rep. Barney Frank, D-Mass., right, after signing the Dodd-Frank Wall Street Reform and Consumer Protection Act in Washington on July 21, 2010. Dodd and Frank have since both left Congress. (Pablo Martinez Monsivais/AP)

In July 2010, nearly two years after the 2008 financial crisis exposed the vulnerability of the world’s economic system, Congress passed sweeping changes to laws regulating the U.S. financial industry. Washington Post associate editor Robert G. Kaiser persuaded the bill’s main sponsors, Rep. Barney Frank (D-Mass.) and Sen. Christopher J. Dodd (D-Conn.), to give him behind-the-scenes access to observe the bill’s journey from conception to enactment, an 18-month odyssey that involved extensive maneuvering and dealmaking. This account of one deal, reported here for the first time, is drawn from Kaiser’s new book, “Act of Congress: How America’s Essential Institution Works, and How It Doesn’t.”

The most ambitious legislative effort to reform the country’s financial system in nearly 80 years was just a few weeks old, and already the bill was in trouble.

Members of the House Financial Services Committee, the bill’s first stop in the summer of 2009, were facing a barrage of complaints from hometown bankers and the industry’s army of Washington lobbyists. They wanted to block the creation of an independent regulatory agency aimed at protecting consumers from the risky financial products that had helped bring on the Great Crash of 2008.

The proposed Consumer Financial Protection Agency (CFPA) was a centerpiece of the legislation drafted by the new Obama administration and introduced by Rep. Barney Frank, the Massachusetts Democrat who chaired the House committee. Frank had been chairman for only 21 / 2 years, but after 14 terms in the House he thought he could sense which way the legislative winds were blowing.

He did not like the breezes he was feeling that summer. Too many Democrats on his committee were wavering under the intense lobbying.

Robert G. Kaiser’s new book comes out Tuesday, May 7. (FTWP)

“The banks are now mobilizing, going crazy about this,” Frank said not long after the bill’s introduction, during one of many interviews conducted as the bill progressed. “Some of my members are getting shaky. I’ve said to them, ‘You’ve got to understand. If you kill this bill now, you’ll get creamed. You’ll get primary opponents. It will be [seen as] the people against the banks, and the Democrats [had] caved in again.’ ”

Frank saw the Great Crash as a terrifying event that created a welcome chance to make historic changes in the regulations governing the financial industry, which had changed radically in recent decades. He wanted to write “a new New Deal,” as he put it. Barack Obama’s resounding victory in 2008, along with expanded Democratic majorities in the House and the Senate, seemed to make this a realistic possibility.

The idea for a Consumer Financial Protection Agency had originated with a Harvard Law School professor named Elizabeth Warren, who argued that the government should enforce the clarity and reliability of financial products the way it monitored the safety of cribs and tricycles. The Obama administration and Frank saw the exotic mortgages that contributed to the Great Crash as evidence that supported Warren’s analysis. The banks saw something else: a new layer of expensive oversight that wouldn’t stop the people they considered to be the real culprits — the mortgage packagers and others in the unregulated “shadow” banking sector that had inflated the housing bubble.

Frank was determined to protect the CFPA, and he had an idea: He thought he might be able to win over an ally from inside the industry, someone with the standing and credibility to ease the pressure and reassure nervous Democrats on his committee.

Frank knew he could not find such a partner at the American Banking Association (ABA), whose attacks on the bill had already provoked his famous temper. In late July 2009, Frank had wandered into a meeting between Jeanne Roslanowick, his top aide on the committee, and Floyd Stoner, a popular lobbyist for the ABA. Stoner was explaining what his members wanted to see in the final bill.

Frank cut Stoner off. “I’m told we’re in all-out war,” Frank said, repeating the phrase he had heard the banking industry lobbyists use to describe their effort to block the CFPA. “So what do I care what you want in there?”

Stoner, a former House Democratic staff member who felt he enjoyed good relations with Frank, was taken aback.

The ABA was a formidable foe, with 370 employees occupying 41 / 2 floors of a Connecticut Avenue office building opposite the Mayflower Hotel. Generous in its campaign contributions, it generated the sort of analytic information that legislative staffs crave. Stoner’s boss, ABA President Edward Yingling, had strong tribal credentials on Capitol Hill. His father, Jack Yingling, had served as chief clerk — equivalent to today’s staff director — of the Senate banking committee in the 1950s and 1960s, under two Democratic chairmen. After 25 years as the ABA’s chief lobbyist and then the association’s head, Yingling knew how to take advantage of the ABA’s considerable resources.

Like Frank, Yingling also had a finger in the wind. He had conceded publicly that some reform was necessary but had maintained stiff opposition to a new agency. “When the CFPA proposal came out,” Yingling said in an interview, “there was a feeling that there was so much momentum behind it, it would be hard to fight. So somebody had to come out hard against this. We decided we should be the ones.”

But Frank had his eye on another prominent figure from the banking lobby: Camden Fine, president of the Independent Community Bankers of America, which represented 5,300 smaller banks. There were ICBA members in every congressional district. Most of them were influential citizens. As their man in Washington, Fine enjoyed respect among House members.

Frank hoped to capitalize on Fine’s standing.

The little guys

Fine was a small-town banker with his own roots in Democratic Party politics. A practical-minded Missourian with an open, friendly face, he had served on the school board and city council of Jefferson City, the state capital. When he told his father that he might like to run for Congress, he recalled, “my dad gave me some good advice: ‘Son, it’s better to be the best friend of a politician than to be the politician himself.’ ”

Most small banks belonged to Fine’s organization. Many also belonged to the larger ABA, but because the biggest banks seemed to dominate the ABA, small-town bankers often felt that their interests were pushed aside. Fine believed that the homogeneity of his membership made his job easier than Yingling’s. “To be fair,” he said, “Ed had to satisfy the behemoths on Wall Street at the same time he was trying to please the community banks. That was a very awkward position.”

Beginning in 2007, when a weakening housing market and tightening credit heralded the beginning of the financial crisis, the ICBA launched a public campaign to emphasize that community banks were not to blame. Fine wanted to separate his members from the big boys in the minds of Washington politicians. “The term we used was megabanks, the Wall Street megabanks,” Fine said. “We made this about Main Street versus Wall Street.”

Fine was delighted when Obama’s new secretary of the Treasury, Timothy F. Geithner, called him on Jan. 27, 2009. It was Geithner’s second day on the job. “I don’t routinely get calls from the secretary of the Treasury,” Fine said. The next day, he was in Geithner’s huge office on the second floor of the Treasury Department, with its view of the Ellipse and the Washington Monument.

Fine recalled Geithner’s words from their 75-minute tete-a-tete: “You’re the very first meeting I’ve had as secretary of Treasury because I think community banks are important. As president of the New York Fed, I was watching your campaigns in Washington and listening to your speeches, and I think you made some points . . .

Geithner told Fine that reform was coming. Fine spelled out the ICBA’s view that small banks were not responsible for the Great Crash and shouldn’t be unfairly punished by the new legislation. Fine later said, “The gut reaction of the entire industry was of course we have to oppose, oppose, oppose, because it’s going to mean more regulatory burden on us all.”

But Fine did not want to just oppose. “I started to jawbone my 10 members [of the ICBA governing board] in April. I said, ‘Look, there’s going to be landmark legislation. . . . Even if the Republicans were in charge, this is such a deep and horrendous economic crisis and financial crisis that this Congress cannot afford to do nothing.’ ”

Fine’s executive committee approved his strategy. When Frank and Christopher J. Dodd’s Senate banking committee held separate hearings on the CFPA idea in June and July 2009, Yingling testified at both. Fine stayed away. Fine explained the ICBA’s strategy: “Keep our powder dry.”

‘Cam, it’s just you and me’

Frank understood what Fine was up to and hoped to exploit the differences between the two associations. In late September 2009, Frank asked Roslanowick to set up a meeting with Fine.

Fine came alone to Frank’s enormous office in the Rayburn Building. Frank was joined by Roslanowick and two other aides. Fine later recounted Frank’s pitch. “Barney started to talk very fast: ‘There’s going to be a bill, and either you’re going to have to get on the bus or be run over by it.’ I said I didn’t necessarily agree. At that point he said, ‘My staff says you’re really worried about this consumer agency.’ And I said, ‘Yes, I think it’s totally unnecessary for the regulated part of the industry,’ ” referring to the banks.

Fine repeated his usual objection to the CFPA: “We don’t need another consumer division . . . to be shoved down our throats. We’re up to our eyeballs in that stuff, and have been for years.”

“Then came a turning point,” Fine said. “Barney said, ‘Jeanne, could you and the others please leave me alone with Cam?’ They were surprised, filed out of the room, and Barney says: ‘Okay, Cam, it’s just you and me. . . . I don’t expect you to support the consumer agency in public, but what’s it going to take to get you to be neutral, just not say anything?’

“I said, ‘Well, Mr. Chairman, that’s going to take a lot!’ I said, first of all, we can’t have examination forces from this bureau coming into our banks. They just can’t take another one. They already have external auditors. They have the FDIC or the Fed or the OCC [Office of the Comptroller of the Currency]. . . . Hell, these [small] banks only have 20 or 30 employees, and they’re being eaten alive by exams.’ ”

They jockeyed back and forth, settling on a standard: The CFPA’s supervision would extend only to banks whose assets exceed $10 billion, the Federal Reserve’s suggested dividing line between small and large banks. (The assets of the biggest banks are measured in trillions of dollars.)

Fine knew — but did not volunteer — that just four of the ICBA’s 5,300 member institutions had assets exceeding $10 billion. Frank knew — but did not say — that his compromise would not exempt small banks from any new rules written by the CFPA. Instead, Frank was offering to allow the traditional regulatory agencies to handle enforcement at the smaller banks most of the time, rather then sending a separate examiner from the CFPA.

Frank impressed Fine by talking with apparent candor about the politics of his committee. As Fine remembered it, Frank said: “Here’s my problem, Cam. I’ve got some pretty radical guys on the left on my committee, and they’re not going to like this. They’re purists, and they don’t want any compromise at all. I’ve got to do enough to satisfy them while at the same time satisfying the right as well.” Fine said he understood this reality.

Then Fine brought up his secret weapon, “the Gutierrez amendment.” The ICBA had persuaded Rep. Luis V. Gutierrez, a Democrat from Chicago, to introduce a proposal that would change the formula by which banks were assessed to support the Federal Deposit Insurance Corp.’s bailout fund. The FDIC uses this fund to finance its insurance of accounts at FDIC-insured banks that fail.

Historically the assessment was based on a bank’s total deposits. The ICBA thought it should be based on total assets. The big banks had relatively little in deposits, while holding much larger assets from sources other than their customers’ bank accounts. Basing the assessment on all assets would shift more of the insurance premium burden to the big banks, resulting in small banks paying less.

Fine pointed out that small banks were paying 32 percent of the total FDIC assessments, while holding just 19 percent of total bank liabilities. Frank agreed that this seemed unfair, Fine recalled. Frank also told Fine that the big banks “have about as much credibility around here as Ahmadinejad,” referring to Mahmoud Ahmadinejad, the president of Iran. Fine gleefully reported that line to his board of directors.

Frank said he would allow the Gutierrez amendment to go forward if FDIC Director Sheila Bair approved. Fine already knew she was sympathetic. The change would save community banks about $1.5 billion a year—more than 30 percent of what they were paying in FDIC assessments. This was money that went “straight to their bottom lines,” as Fine put it. Rarely is a Washington lobbyist able to deliver such a cash benefit to his clients.

In return, Fine said, Frank wanted the ICBA’s help on the CFPA. “Barney said, ‘I’m not asking you to come out in support, but will you just stay silent?’ . . . I said: ‘I can make that work. We’ve got a deal.’ . . . I reached across the desk and shook his hand.”

‘We are on the inside’

Fine rushed back to his office. With characteristic enthusiasm, he wrote an e-mail to his board with this heading: “ULTRA SECRET – BURN BEFORE READING – EYES ONLY – DO NOT SHARE OR DISSEMINATE TO ANYONE!” After warning that any leak could be disastrous, Fine summarized his meeting with Frank in the language that many Washington operators consider English:

“I think at the end of the day we can work a deal that pretty much gets our banks out from under the CFPA rock, but hangs the megabanks out there. . . . The take-away is that ICBA is the player on the House financial reform legislation and the other financial trades [trade associations] are not. This is a very unusual position for ICBA. . . . We are on the inside, and the other guys are wondering what is happening.”

A few days later, Fine recalled that he and Frank “bumped into each other, both of us going to the same fundraiser at a Capitol Hill townhouse. . . . I said, ‘Oh, hi, chairman.’ And he said, ‘Cam, I’ve got this thing done on my side. Will you keep your side of the bargain?’ I said: ‘I shook your hand. I’ll keep my side of the bargain.’ And I did.”

The Frank-Fine deal was one of the most important made on the path to what would become, nine months later, the law now known as Dodd-Frank. But the world at large knew nothing about it. The meeting between the two men on that Sept. 25 was not reported in the news media. The small number of people who knew about it kept the secret.

The Gutierrez amendment also received scant attention. Ultimately, it became part of the final Dodd-Frank bill. It cost the big banks big bucks — at least $1.4 billion in increased FDIC payments in its first year in force.

Frank had neutralized one of the most influential interests on the CFPA issue. He felt he hadn’t given up anything that he considered vital to the reform effort generally, or to the proposed consumer agency specifically. He had made Fine a partner, and that partnership proved invaluable in the months ahead.

* * *

The final version of the Dodd-Frank bill, signed by Obama in 2010, included the Consumer Financial Protection Bureau, which is now operating. A compromise in the Senate placed the bureau nominally within the Fed, which meant that it could not be called an independent agency, essentially a cosmetic change to appease opponents. Since the legislation’s enactment, Frank and Dodd have retired from Congress, each choosing not to seek reelection. Warren is now the senior senator from Massachusetts.