Senate Plan Would Expand Regulation of Risky Lending

Senate Plan Would Expand Regulation of Risky Lending
By STEPHEN LABATON
Copyright by The New York Times
Published: November 10, 2009
http://www.nytimes.com/2009/11/11/business/11regulate.html?hpw


WASHINGTON — The chairman of the Senate banking committee proposed on Tuesday to drastically overhaul the regulatory system by consolidating bank agencies, creating a consumer financial protection agency and imposing new restraints on exotic financial instruments and credit rating agencies.

The 1,136-page plan by Senator Christopher J. Dodd, a Connecticut Democrat, differs in major respects from both the White House and House plans. Even before it was made public, it had encountered sharp resistance from Republicans and powerful business interests in Washington. With only a few weeks left in the legislative session, it is all but certain that Congress will not deliver on President Obama’s request to repair the financial regulatory system by the end of the year unless major compromises are quickly struck.

Still, the long-awaited Senate plan is significant as a starting point for the lawmakers, who are increasingly talking about trying to complete legislation during the first three months of 2010. While the measure will inevitably be revised during weeks of behind-the-scenes negotiations, it lays down the first marker by Mr. Dodd and other senior Democrats on the banking committee.

Mr. Dodd has said he hopes to move the bill through the banking committee in the next few weeks. In recent days he has been rewriting major portions to gain support from more Democrats on the committee.

In the House, Representative Barney Frank has guided the Financial Services Committee through a series of legislative drafting sessions that could lead to passage of a comprehensive bill by the full House as early as next month. His committee has already approved a host of major regulatory changes and is expected to complete work soon on a contentious chapter that would give the government greater authority to seize large and troubled financial companies.

But in the Senate, where 60 votes are required to move controversial legislation through the chamber, Mr. Dodd has considerable work ahead of him.

Senior administration officials said the Dodd plan was a good starting point that, while different from the White House plan in major ways, embraced its core principles and addressed many of the problems that had been identified as causes of the financial crisis.

Mr. Dodd and his staff had held regular meetings with Senator Richard C. Shelby of Alabama, the ranking Republican on the banking committee, but those talks recently broke down. Mr. Shelby is said to be opposed to major provisions of Mr. Dodd’s bill, most notably the creation of an agency to protect consumers from abusive and deceptive mortgages and credit cards. Mr. Dodd has yet to produce a Republican who supports his plan. Moreover, several provisions will probably be opposed by moderate and conservative Democrats with ties to various industry groups that have raised objections to the measure.

The Dodd proposal would create an agency to monitor and address systemic risks posed by large financial companies. It would give the agency the authority to write tougher capital standards and to break up any companies if they posed a threat to the financial stability of the nation.

The proposal would merge the current federal supervisory oversight of the banking system from four agencies into one new agency. It would create a separate division within that agency to regulate smaller banks. The biggest losers under such a plan would be the Federal Reserve and the Federal Deposit Insurance Corporation, two of the bank agencies that would go out of the business of handling day-to-day supervision of thousands of institutions.

Both the White House and the House plan do not go that far in consolidating agencies. Rather, they would merge the four bank agencies into three by combining the Office of the Comptroller, which regulates federally chartered banks, with the Office of Thrift Supervision, which supervises savings and loans. They would not change the authority of the Federal Reserve and the Federal Deposit Insurance Corporation to regulate banks.

One big winner under Mr. Dodd’s plan is the Securities and Exchange Commission, which would not only get greater authority but more resources. Adopting a proposal by Senator Charles E. Schumer, Democrat of New York, the plan would permit the commission to retain the fees it charges Wall Street and by being self-financed, not only have a larger budget, but also remove the political constraints of being financed each year by Congressional appropriations. Democratic and Republican leaders of the commission have sought such authority for decades but Congress, which prefers to use the power of the purse as a tool to supervise the agency, has never agreed.

Mr. Dodd’s plan would impose tighter restrictions on the largely unregulated derivatives market. It would require many derivatives to be traded through clearinghouses where they could be monitored.

The measure would require that hedge funds with more than $100 million in assets be registered with the S.E.C. and disclose financial information so that they could be monitored by regulators.

In the area of corporate governance, the measure would give shareholders the right to hold nonbinding votes on the pay of senior executives. It would give shareholders more of a say in nominating directors. And it would impose new requirements on the compensation committees of boards.

The legislation would also place new restrictions on financial companies that repackage mortgages into securities and sell them in the secondary market. It would require such companies to hold at least 10 percent of the mortgages so that they would have a financial incentive to assure the quality of the securities.