Planned Consumer Protection Agency Dies in DC

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WASHINGTON (TheStreet) — Details of the latest financial regulatory reform compromise suggest that Congress may shift some powers around without making any significant changes to the status quo.

In perhaps the most ironic twist, a proposed Consumer Financial Protection Agency has been the most contentious item, held back by special interests and financial lobbyists. Though consumers have suffered the most and the longest of any party to the financial crisis, the entity charged with protecting them may become a "watchdog" that's wrapped into another agency, whose decisions could be swatted down by other regulators.

The regulatory reform bill started off over a year ago, as a proposal by the Obama administration. A revised version passed through the House of Representatives in December, but the Senate has been locked in a partisan battle over a few items, the CFPA being the stickiest spot.

Other issues include whether to have the Federal Reserve take on more responsibility for risk management, since it failed to act while the housing bubble inflated, how to deal with banks considered "too big to fail" and whether to include the so-called "Volcker rule" which would limit banks' activities if they held consumer deposits.

Sen. Chris Dodd (D-Conn.), who chairs the Senate Banking Committee, became so frustrated with the divisions that he decided to start from scratch and work out a new bill entirely. Dodd is retiring this year and appears to be set on passing some type of meaningful reform, even if it isn't ideal.

A summary of the bill was released on Friday, and the consensus reaction from the media so far seems to be it's a watered-down compromise that shuffles responsibility and adds layers of bureaucracy.

The CFPA would become a Bureau of Financial Protection, housed within the Treasury Department. It would have an independent director chosen by the president, and would need to consult with other regulators before issuing rules, and explain those negotiations publicly before any rules are made official. The bureau would have less enforcement power than the initially proposed agency, and could only oversee banks with more than $10 billion in assets.

When it comes to streamlining the regulatory system — one of the key goals of this reform in the first place — the proposal appears to fall flat.

Other than merging the Office of Thrift Supervision into the Comptroller of the Currency, all current regulators would remain in place, with responsibilities shifted. The Fed would oversee large financial institutions, like Citigroup (Stock Quote: C), Bank of America (Stock Quote: BAC), JPMorgan Chase (Stock Quote: JPM), Wells Fargo (Stock Quote: WFC), Goldman Sachs (Stock Quote: GS) and Morgan Stanley (Stock Quote: MS), but hand over responsibility for state-chartered banks to the Federal Deposit Insurance Corp. Instead of the Fed leading an inter-agency council to oversee systemic risk, the Treasury would get that responsibility.

The fate of other important items — executive pay, the Volcker rule — may effectively be left on the cutting room floor. The two senators assigned by Dodd to hammer out shareholder-rights issues are still reportedly in a deadlock. Rather than force big banks to give up their capital markets businesses, regulators will get the power to order them to stop certain activities.

As for "too big to fail," the government will have the power to step in with emergency loans, then unwind complex institutions through a bankruptcy-like process. Sounds kind of like what American International Group is in the process of doing today, after the government stepped in with emergency loans.

It's unclear how these reforms will have a meaningful impact on the already complex, interwoven and ineffective U.S. financial regulatory system of today. Consumer advocates have railed against the revised draft, saying some of the items will make things different, but not really changed.

"Effective reform is once again being blocked by opposition from the big banks that caused the current financial crisis," Heather Booth, Executive Director of Americans for Financial Reform, said in a statement. "The revised proposal does not provide what is needed to protect American families or the financial system as a whole."

If nothing else, there's solace in the fact that consumers are voters, too, and midterm elections are just months away.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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