For all the proposals stuffed into its 1,336 pages, the financial reform bill that's headed to the full Senate soon will change very little for the banks that brought us the most dire financial system crisis since the Great Depression, critics say.
When proposed a year ago by Senate Banking Committee Chairman Christopher Dodd, D-Conn., the Restoring American Financial Stability Act of 2010 held enormous promise. The bill was supposed to unify a patchwork of rules and agencies, regulate a “shadow” banking system that hid the riskiest bets, protect taxpayers from picking up the tab for another bank bailout and create a new agency to protect consumers from predatory lending.
After a year of debate, the bill that emerged from the committee Monday was riddled with loopholes, compromises and watered-down provisions that undermined the proposals’ principal goals, critics say.
"It doesn't do any significant reform of the system that got us into this problem," said William Isaac, chairman of the Federal Deposit Insurance Corp. during the Reagan administration. "All it does is shuffle the same powers around among the same agencies in a little different way. It really hasn't changed anything."
To be sure, the package is comprehensive in scope, with 11 separate sections covering segments of the financial services industry. The bill would set up a national insurance regulator, overhaul the powers of the Federal Reserve, set up procedures for shutting down banks that are “too big to fail,” regulate risky derivatives and establish a new agency to protect consumers.
But critics of the bill — and there are many on both sides of the aisle — complain that, as currently written, the sweeping proposal fails to live up to the promise of protecting consumers from predatory lenders, preventing bankers from taking on too much risk and ensuring that taxpayers won't have to bail them out again if they get in trouble.
One of the most contentious sections of the proposed law, the establishment of an independent agency to protect consumers, is being attacked by Republicans and Democrats.
“It’s the consumer abuse and the lack of accountability and the lack of oversight of the lenders that got us into this mess,” said John Taylor, president of the National Community Reinvestment Coalition, which advocates for broader access to basic banking services. “Unfortunately, it looks like this agency is independent in name only."
Actions by the agency, which would be housed within the Fed, would be subject to review by a new oversight council consisting of bank regulators. Only the biggest banks — roughly 100 of the 8,000 in the U.S. — would be subject to regulation. Those with assets under $10 billion would be exempt.
“The size of assets shouldn’t be the reason they’re not covered by a meaningful, strong consumer protection agency,” said Taylor.
The new agency’s authority could be curbed further as the bill moves toward consideration by the full Senate, where Republicans have promised to press for amendments. Opponents of the proposed agency argue that “safety and soundness” of the banking system trumps other considerations.
Sen. Richard Shelby of Alabama, ranking Republican on the Banking Committee, said he worries that a new agency might work at "cross-purposes" with other bank regulators.
"We don't need this," he said. "We can't have that. Safety and soundness, the creditworthiness of a bank, a bank able to stay in business and loan money is the No. 1 thing.”
Bankers and Wall Street firms have scored other critical points over the past year as the legislation has taken shape.
For example, the bill would require credit default swaps and other risky derivatives to be traded on regulated exchanges but creates a loophole for “customized” contracts. Hedge funds would have to register with the SEC, but other private pools of capital like private equity firms would be exempt.
One of the major goals of regulatory reform was to plug gaps that have developed over decades as a patchwork of laws granted state and federal agencies responsibility for various parts of a rapidly evolving financial system.
“The history has been that many of these agencies haven’t been very effective and have had close relationships with the industry,” said Dean Baker, co-director of the Center for Economic and Policy Research, an economic policy research group . “And that’s a really big problem.”
Infighting among those agencies, chiefly the Fed, FDIC and the Office of the Comptroller of the Currency, along with intense lobbying by companies they regulate, has largely preserved the status quo. That leaves the existing patchwork of regulators — and the potential for loopholes — largely intact. Banks will still be regulated by, among others, the National Credit Union Administration and 50 separate state banking regulators. (The Office of Thrift Supervision will be eliminated and its functions folded into other bank regulators.)
One goal that all sides agree on is that the new law should eliminate the threat that a bank or other company becomes “too big to fail,” requiring taxpayers to put up hundreds of billions of dollars to keep it alive. During the 2008 financial crisis, the list went beyond the banking industry to include General Motors, Chrysler and insurance giant AIG.
The Dodd bill would address that problem by raising a $50 billion fund, paid for by the largest banks, that would be used to unwind failing banks according to procedures spelled out in the law. To some, that sounds like a repeat of the $700 billion Troubled Asset Relief Program that has been used to bail out banks, car companies and homeowners with bad mortgages.
“Some people argue if we have the pot of money, some call it a honey pot, it could be used for unintended purposes,” said Shelby. “And that is the danger. That's going to be part of the debate. Can we do ‘too big to fail’ without money being advanced?”
The debate will be more contentious because of the unusual way the bill was approved by the banking committee — after just 21 minutes of review — along party lines. Republicans decided to hold their fire and likely will offer a host of amendments during debate in the full Senate, which is not expected to begin for a few weeks.
The decision came as Dodd, impatient with ongoing negotiations, insisted the time had come to enact tough new reforms to prevent another serious financial crisis. Critics argue that time has long since passed.
“Senator Dodd himself proposed very serious significant regulatory restructuring last November,” said Isaac. “He has caved. He has abandoned any sort of serious regulatory reform.”