Dodd Proposes Financial Reform Legislation

Enlarge Charles Dharapak/AP

On Tuesday, Senate Banking Committee Chairman Sen. Christopher Dodd of Connecticut introduced his proposal for financial reform legislation, which calls for creating a single federal bank regulator.

Charles Dharapak/AP

On Tuesday, Senate Banking Committee Chairman Sen. Christopher Dodd of Connecticut introduced his proposal for financial reform legislation, which calls for creating a single federal bank regulator.

Senate Banking Committee Chairman Christopher Dodd on Tuesday called for sweeping new government powers to prevent another economic collapse, protect consumers and dismantle failing institutions.

Dodd's 1,100-page draft, inspired by last year's financial meltdown and President Obama's call for new financial regulations, is aimed at minimizing "economic turmoil and protect[ing] the interest of taxpayers," the Connecticut Democrat wrote.

President Obama has demanded that Congress rewrite the federal regulations governing Wall Street to close legal loopholes and prevent the kind of fraud and abuse that fed the crisis.

"The financial crisis exposed a financial regulatory structure that was the product of historic accidents — one after another over the past 80 years, created piece by piece over decades with little thought given to how it would function as a whole and unable to prevent threats to our economic security," Dodd said.

The draft legislation aims to create a "new architecture" that will make financial institutions "more transparent, more responsible and more accountable to the American people," he added.

Some of the key points of the bill include:

— Establishing a consumer financial protection agency that will end abusive practices and provide clear and accurate information to Americans.

— Ending the era of "too big to fail" regulation in order to prevent large and complex companies from harming the U.S. and global economy. This would include imposing new capital requirements on such companies and requiring them to write their own "funeral plans" in the event that they fail.

— Creating a single federal bank regulator in lieu of a system in which multiple regulators have unnecessary overlap and conflicting regulators. Dodd said the system now in use enables large banks to shop for a regulator that fits their needs rather than the public interest.

Democrats lined up to support Dodd's proposal on Tuesday. Among those was Sen. Charles Schumer (D-NY), who said this legislation "will reform Wall Street and protect Main Street" from future financial crises.

Schumer said the proposal would help bolster the Security and Exchange Commission's enforcement abilities, guaranteeing a stable source of funding for the agency by allowing it to retain the fees it collects.

"Right now the SEC doesn't have the money it needs to hire enough analysts [and] update its technological resources," he said, citing its flawed handling of the Bernard Madoff case as a textbook example. "The SEC is just overwhelmed and overmatched by the people it regulates."

Schumer also said the legislation would provide a number of pro-shareholder measures including having a say on pay — the ability to vote on compensation packages for executives.

The Financial Services Roundtable, an industry group that represents big financial institutions, has some reservations about the bill.

"We're against creating a separate agency to protect consumers," said Scott Talbott, the chief lobbyist for the group. "We think you can protect consumers a more effective way by strengthening the existing regulators rather than creating a separate agency."

Talbott said his members support Dodd's proposal for a new systemic risk regulator. But large banks haven't expressed a preference regarding whether it's best to have a single or multiple regulator, he added.

The Obama administration reacted positively to Dodd's bill.

"I think we're in a strong position, substantively and politically, to get financial reform done," said Michael Barr, the Treasury Department's assistant secretary for financial institutions.

But Republicans haven't signed on yet.

Among the top points of contention is Dodd's desire to create a new agency to protect consumers who take out home loans or use credit cards against predatory lending and surprise interest rate hikes.

Republicans counter that creating another bureaucracy will make business harder for banks and limit the availability of credit.

The Senate Banking Committee is expected to review the legislation next week, paving the way for a floor vote by early next year.

The House was already on track with its own proposal. Rep. Barney Frank, chairman of the House Financial Services Committee, said he expects a floor vote in December.

Dodd's plan differs slightly from Frank's bill and the administration's proposal in that it would do more to scale back the powers of the Federal Reserve, which many lawmakers blame for the economic crisis.

For example, Frank has proposed that the Fed be in charge of enforcing tougher regulations on large and influential financial firms so that they don't grow "too big to fail." A council of regulators would monitor these firms and make recommendations.

Under Dodd's bill, the Fed would have less reach. An "agency for financial stability," managed by a board that includes Fed representation, would enforce new rules and dismantle complex financial firms if they threaten the broader economy.

Both the House and Senate bills are likely to put limits on the Fed's ability to provide emergency loans and eliminate its oversight of consumer protections.

Also unlike the House bill, Dodd's proposal would establish a single federal regulator for banks, called the "Financial Institutions Regulatory Administration."

The single regulator would get rid of two existing federal bank regulators — the Office of the Comptroller of the Currency and the Office of Thrift Supervision. It also would strip the Federal Deposit Insurance Corp. of its oversight of state banks and the Fed of its supervisory powers of bank holding companies.

From NPR staff and wire reports