Dodd Unveils Financial Regulation Bill Sen. Chris Dodd (D-CT) unveiled a financial regulation bill Tuesday that would take the job of overseeing banks away from the Fed, and give it to a new agency. But fellow Democrats Barney Frank (D-MA) and President Obama have a different approach on the issue. David Wessel, economics editor of The Wall Street Journal, offers his insight.

Dodd Unveils Financial Regulation Bill

Dodd Unveils Financial Regulation Bill

  • Download
  • <iframe src="https://www.npr.org/player/embed/120300307/120300279" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

Sen. Chris Dodd (D-CT) unveiled a financial regulation bill Tuesday that would take the job of overseeing banks away from the Fed, and give it to a new agency. But fellow Democrats Barney Frank (D-MA) and President Obama have a different approach on the issue. David Wessel, economics editor of The Wall Street Journal, offers his insight.

RENEE MONTAGNE, host:

And the government is pressing on with efforts to revamp financial regulation. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, offered a new financial reform bill yesterday. Its more than 1,000 pages long and its very different from proposals offered by the president and Barney Frank, who is Senator Dodds counterpart in the House.

To find out more, we turn to David Wessel. Hes economics editor of the Wall Street Journal and joins us from time to time. Hes here with us this morning. Good morning.

Mr. DAVID WESSEL (Wall Street Journal): Good morning, Renee.

MONTAGNE: Now, Senator Dodd would take away much of the Federal Reserves power to oversee banks. He would give that power to a new agency. So whats his argument in doing that?

Mr. WESSEL: Basically he says that the Federal Reserve failed in its job of watching over the banking system - thats why we had such a big crisis - and that the Fed would be better off focusing on one mission, moving interest rates to keep the economy growing and prevent inflation, and instead we should have one agency thats responsible for banks - its accountable - and another agency thats responsible for monitoring consumers. Its a model that some other countries have tried with very mixed results.

MONTAGNE: And why is it that President Obama and Barney Frank, over in the House, why is it that theyre taking a different approach?

Mr. WESSEL: I think there are really two basic reasons. One is, they dont think its a good idea to separate bank regulation from the business of making monetary policy and moving interest rates. The British tried that and they had a huge problem with coordination and ended up with an even worse banking crisis than we did.

And the second thing is that Mr. Obama and Mr. Frank want to get something done and they understand that in Washington its hard to make radical change. So theyre trying to make big changes but kind of stick with the existing structure, and Mr. Dodd is choosing otherwise.

MONTAGNE: And the Fed itself - not too thrilled with this idea?

Mr. WESSEL: Oh, thats interesting. So the Fed hates this Chris Dodd proposal, but theyre being very quiet about it. Both Alan Greenspan, the former Fed chairman, and Ben Bernanke, the current Fed chairman, have argued for years that the Fed cannot do its job unless it really has its hands on and its eyes and ears in the banking system. And they look at this recent crisis as evidence of that.

It wasnt a problem of inflation or unemployment that started this thing. It was a collapse of the banking system. And they say that if the Fed werent intimately involved with that, it couldnt do its main job.

MONTAGNE: And David, beyond the pros and cons of these two different approaches, what in the case of Senator Dodds proposal are the politics?

Mr. WESSEL: Thats also a good question, Renee. So the Fed is very unpopular on Capitol Hill now and in a lot of the country. And Senator Dodd is taking advantage of that, I think, to show that hes not captured by the Washington/Wall Street establishment. Hes making a big point that he has something different, far-reaching, challenging the Fed. And I think that serves his political interests.

Senator Dodd from Connecticut is up for reelection. He has a very hard fight. He got a bit of controversy for some mortgage loans he took from Countrywide Financial. And so hes using this as an opportunity to show his independence and to stand up for something that he knows that the Fed, the Treasury, and maybe even Barney Frank dont like. The problem is that it may make it very, very hard to get anything done.

It seems to me the bill is unlikely to end up looking like Senator Dodds. Its more likely that this will lead to a long period of gridlock and that nothing will happen until some time next year.

MONTAGNE: Well, its certainly true that the Fed exercised extraordinary power in this crisis that weve been in. You wrote about that in your new book on Fed Chair Ben Bernanke. How would Senator Dodd change that?

Mr. WESSEL: He would change that it in a lot of different ways. I think the most significant is he would greatly limit the Feds ability to make these emergency loans to firms like Bear Stearns, AIG. He would put some of that in the hands of a new council of regulators and greatly circumscribe their ability to do that in an emergency.

MONTAGNE: David, thanks very much.

Mr. WESSEL: Youre welcome.

MONTAGNE: David Wessel is economics editor of the Wall Street Journal.

Copyright © 2009 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Dodd Proposes Financial Reform Legislation

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 hide caption

toggle caption
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

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