Financial overhaul legislation stalls in U.S. Senate

March 8, 2010

The Sacramento Bee

Eighteen months after the near-collapse of the U.S. financial system, lawmakers still can't agree on how to fix what went wrong, despite abundant evidence of the economic devastation the crisis has caused.

The House passed a sweeping overhaul of financial regulation in December, but the legislation is now tied in knots in the Senate. There, Democrats and Republicans have argued fruitlessly for months while Americans feel the aftershocks of the meltdown in the form of high unemployment, record lengths of joblessness and a historic plunge in lending.

The House legislation, patterned largely on the Obama administration's blueprint, tackles such areas as the first-ever regulation of complex financial instruments, and new bankruptcy-like powers to liquidate giant financial institutions if their problems threaten the broader financial system.

The biggest obstacle to agreement remains the administration's proposal for a stand-alone consumer finance protection agency to police credit products such as mortgages, credit cards, student loans and even payday loans.

Senate Banking Committee Chairman Chris Dodd, D-Conn., has floated a compromise with Republicans to scrap the stand-alone requirement in favor of an agency that would be independent but housed in an existing bureaucracy, such as the Treasury Department or perhaps the Federal Reserve.

"Things continue to move very well," Sen. Bob Corker of Tennessee, one of two Republicans negotiating with Dodd on compromise language, said Wednesday.

Another influential Republican was more direct. "There will be a bill, but it will be very much cut back from what the House passed," said Iowa Sen. Charles Grassley of Iowa, the top Republican on the Senate Finance Committee. "There will be consumer protection but probably not under a separate agency. I don't know where it could be housed."

The more substantive question of what consumer protection powers the agency would have is the issue on which Democrats and Republicans are drawing lines in the sand. The impasse could doom the legislation.

"Most significant is what powers will (the agency) have? Will we be able to do something about what happened to consumers over the last few years?" Dodd asked Wednesday on MSNBC.

The U.S. Chamber of Commerce, lobbying hard against a new agency, was unmoved.

"Our concern here has been that this new agency or independent division would have these very broad regulatory authorities that would, at the end of the day, choke off the availability of credit for small business and consumers," said Ryan McKee, senior director of the chamber's Center for Capital Markets.

Business groups and banks fear that the consumer-protection agency could impose costly regulations, raising borrowing costs for consumers and companies.

Consumer groups argue that federal bank regulators failed to protect consumers because they consider banks, not consumers, their constituents. Leaving consumer protection up to the regulators who failed consumers preserves the status quo, they argue.

"We do not believe banking regulators, or any committee or group of those regulators, should be given any authority to veto or delay important consumer protections," Pamela Banks, senior counsel for Consumers Union, which publishes Consumer Reports magazine, wrote to Dodd on Wednesday. "Inaction and delay by banking regulators is what allowed the subprime (mortgage) crisis to fester in the first place, threatening the near collapse of our economy."

Treasury Secretary Timothy Geithner met Wednesday with representatives of 30 advocacy groups and assured them that he won't back off a core goal of strong consumer protection.

"He said that means a dedicated authority with the independence and capacity it needs to be accountable and effective," a Geithner aide said on condition of anonymity to speak more freely. "He said that real accountability requires real independence to make and carry out decisions; independent leadership appointed by the president and confirmed by the Senate; independent budget and administration; independent ability to set clear rules for the consumer financial services marketplace and enforce them."

Geithner was preaching to the choir.

"We urged them to continue to stress the need for an independent consumer regulator that has the power to oversee all players in the financial marketplace, whether they are banks or not, and it has strong enforcement authority," Travis Plunkett, legislative director for the Consumer Federation of America, told McClatchy Newspapers.

So with businesses, banks and consumer advocates all digging in their heels, is it a stalemate?

"I definitely wouldn't call it a stalemate" said Plunkett, noting that substantive talks are taking place in the Senate. "But I would sound delusional if I said something definitely was going to happen.

"It's pretty clear right now that the banks hold the upper hand. All the movement on policy is on what the banks have wanted. I think a lot of people would find it surprising that large banks still have that much power."

Eighteen months after September 2008, when investment banks collapsed and threatened to topple others, prompting government intervention, the urgency for change is waning.

"From an economic point of view, we have time to do this right, and there is a lot of disagreement over what we do," said Douglas Elliott, a former investment banker-turned-researcher at the Brookings Institution, a center-left policy group in Washington. "Politically, it is important to get it done this year. … There is a danger that the longer it goes, the less reform we get."

<- Go Back