Senator Dodd's Bill:|
"Restoring American Financial Stability", A Summary And Discussion Draft
The Market Ticker
November 10, 2009
This is the "Discussion Draft" of Dodd's financial reform bill. As this is another 1k+ page monster (1136 pages in this case) it may take a day or two for me to read it all. Here is the claimed "discussion points" that are allegedly addressed:
1Senate Committee on Banking, Housing, and Urban Affairs, Chairman Chris Dodd (D-CT) Contact: Kirstin Brost/Justine Sessions, 202-224-7391
Create a Sound Economic Foundation to Grow Jobs, Protect Consumers,
Rein in Wall Street, End Too Big to Fail, Prevent Another Financial Crisis
Over the past year, Americans have faced the worst financial crisis since the Great Depression. Millions have lost their jobs, businesses have failed, housing prices have dropped, and savings were wiped out.
The failures that led to this crisis require bold action. We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them. We must create a sound foundation to grow the economy and create jobs.
HIGHLIGHTS OF THE DISCUSSION DRAFT
Consumer Financial Protection Agency:Creates an independent watchdog to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.
Ends Too Big to Fail:Prevents excessively large or complex financial companies from bringing down the economy by: creating a safe way to shut them down if they fail; imposing tough new capital and leverage requirements and requiring they write their own "funeral plans"; requiring industry to provide their own capital injections; updating the Fed's lender of last resort authority to allow system-wide support but not prop up individual institutions; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
Protects Against Systemic Risks:Creates an independent agency with a board of regulators to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the financial system. The agency could require companies that threaten the economy to divest some of their holdings.
Single Federal Bank Regulator:Eliminates the convoluted system of multiple federal bank regulators to increase accountability and end unnecessary overlap, conflicting regulation, and "charter shopping;" keeps in place the healthy dual banking system that governs community banks.
Executive Compensation and Corporate Governance:Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations.
Closes Loopholes in Regulation:Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated - including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.
Protects Investors:Provides tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies to protect investors and businesses.
Enforces Regulations on the Books:Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.
INDEPENDENT CONSUMER FINANCIAL PROTECTION AGENCY
The Consumer Financial Protection Agency will have the sole job of protecting American consumers from fraud and abuse and will ensure people get the clear information they need on loans and other financial products from credit card companies, mortgage brokers, banks and others.
American consumers already have protections against faulty appliances, contaminated food, and dangerous toys. With the creation of the Consumer Financial Protection Agency, they'll finally have a watchdog to oversee financial products, giving Americans confidence that there is a system in place that works for them – not just big banks on Wall Street.
Why Change Is Needed:The economic crisis was driven by an across-the-board failure to protect consumers. When consumer protections are handled by regulators whose primary responsibility is to safeguard the profitability of the companies they regulate, consumer protections don't get the attention they need. The result has been unfair, deceptive, and abusive practices being allowed to spread unchallenged, nearly bringing down the entire financial system.
The Federal Reserve is the primary consumer protection rule-writer, but it has repeatedly failed to act despite repeated demands from Congress. The Federal Trade Commission is responsible for consumer protections for non-bank finance companies, but lacks the authority and capacity to examine them.
The Consumer Financial Protection Agency
ADDRESSING SYSTEMIC RISKS: THE AGENCY FOR FINANCIAL STABILITY
One financial institution should never be capable of bringing down the entire American economy.
The newly created Agency for Financial Stability is an independent agency responsible for identifying, monitoring and addressing systemic risks posed by large, complex companies as well as products and activities that can spread risk across firms. It will discourage companies from getting too large by imposing burdens on them as they grow and give regulators the authority to break up large, complex companies if they pose a threat to the financial stability of the United States.
Why Change is Needed:The economic crisis introduced a new term to our national vocabulary – systemic risk.
In July, Federal Reserve Governor Daniel Tarullo, testified that "Financial institutions are systemically important if the failure of the firm to meet its obligations to creditors and customers would have significant adverse consequences for the financial system and the broader economy."
In short, in an interconnected global economy, it's easy for some people's problems to become everybody's problems. The failures that brought down giant financial institutions last year also devastated the economic security of millions of Americans who did nothing wrong – their jobs, homes, retirement security, gone overnight because of Wall Street greed and regulatory failures.
The Agency for Financial Stability
ENDING TOO BIG TO FAIL
Preventing another crisis where American taxpayers are forced to bail out financial firms requires strengthening big companies to better withstand stress, putting a price on excessive growth that matches the risks they pose to the financial system, and creating a way to shutdown big companies that fail without threatening the economy.
Why Change is Needed:As long as giant firms (and their creditors) believe the government will prop them up if they get into trouble, they only have incentive to get larger and take bigger risks, believing they will reap any rewards and leave taxpayers to foot the bill if things go wrong.
Since the crisis began, a number of institutions previously considered "too big to fail" have only grown bigger by acquiring failing companies, leaving our country with the same vulnerabilities that led to last year's bailouts.Limiting Large, Complex Companies and Preventing Future Bailouts
CREATING A SINGLE FEDERAL BANK REGULATOR:
THE FINANCIAL INSTITUTIONS REGULATORY ADMINISTRATION
The Financial Institutions Regulatory Administration will eliminate the alphabet soup of multiple bank regulators that has led to weak, confusing regulation where it's easy for problems to fall through the cracks and difficult to know who is responsible.
Why Change is Needed:Today, we have a convoluted system of bank regulators created by historical accident. There are 4 federal banking agencies that oversee national and state banks and federal and state thrifts. The result has been charter shopping, where firms look around for the regulator that will go easiest on them and fee-funded regulators go easy on those they regulate in order to keep their business, as well as a mess of overlaps, redundancies, and blurred lines of responsibility.
Experts agree that no one would have designed a system that looked like this. For over 60 years, administrations of both parties, members of Congress across the political spectrum, commissions and scholars have proposed streamlining this irrational system. The Financial Institutions Regulatory Administration will finally achieve that goal.
The Financial Institutions Regulatory Administration
ADDRESSING SYSTEMIC RISKS POSED BY DERIVATIVES
Common sense safeguards will protect taxpayers against the need for future bailouts and buffer the financial system from excessive risk-taking. Over-the-counter derivatives will be regulated by the SEC and the CFTC, more will be cleared through centralized clearing houses and traded on exchanges, un-cleared swaps will be subject to margin and capital requirements, and all trades will be reported so that regulators can monitor risks in this large, complex market.
Why Change is Needed:The over-the-counter derivatives market has exploded in the last decade – from $91 trillion in 1998 to $592 trillion in 2008. During last year's financial crisis, concerns about the ability of companies to make good on these contracts and the lack of transparency about what risks existed caused credit markets to freeze. Investors were afraid to trade as Bear Stearns, AIG, and Lehman Brothers failed because any new transaction could expose them to more risk.
Over-the-counter derivatives are supposed to be contracts that protect businesses from risks, but they became a way for companies to make enormous bets with no regulatory oversight or rules and therefore exacerbated risks. Because the derivatives market was considered too big and too interconnected to fail, taxpayers had to foot the bill for Wall Street's bad bets. Those bad bets linked thousands of traders, creating a web in which one default threatened to produce a chain of corporate and economic failures worldwide. These interconnected trades, coupled with the lack of transparency about who held what, made unwinding the "too big to fail" institutions more costly to taxpayers.
Bringing Transparency and Accountability to the Derivatives Market
Hedge funds worth over $100 million will be required to register with the SEC as investment advisers and to disclose financial data needed to monitor systemic risk and protect investors.
Why Change is Needed:Hedge funds are responsible for huge transfers of capital and risk, but generally operate outside the framework of the financial regulatory system, even as they have become increasingly interwoven with the rest of the country's financial markets.
As a result, no regulator is currently able to collect information on the size and nature of these firms or calculate the risks they pose to the broader economy. The SEC is currently unable to examine private funds' books and records or take sufficient action when it suspects fraud.
Raising Standards and Regulating Hedge Funds
Office of National Insurance: Creates a new office within the Treasury Department to monitor the insurance industry, coordinate international insurance issues, and requires a study on ways to modernize insurance regulation and provide Congress with recommendations.
Streamlinesthe regulation of surplus lines insurance and reinsurance through state-based reforms.
CREDIT RATING AGENCIES
Establishes a new Office of Credit Rating Agencies at the Securities and Exchange Commission to strengthen regulation of credit rating agencies. New rules for internal controls, independence, transparency and penalties for poor performance will address shortcomings and restore investor confidence in these ratings.
Why Change is Needed:Rating agencies market themselves as providers of independent research and in-depth credit analysis. But in this crisis, instead of helping people better understand risk, they failed to warn people about risks hidden throughout layers of complex structures.
Flawed methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency contributed to a system in which AAA ratings were awarded to complex, unsafe asset-backed securities - adding to the housing bubble and magnifying the financial shock caused when the bubble burst. When investors no longer trusted these ratings during the credit crunch, they pulled back from lending money to municipalities and other borrowers.
New Requirements and Oversight of Credit Rating Agencies
EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE
Strengthening Shareholder Rights
Giving shareholders a say on pay and proxy access, ensuring the independence of compensation committees, and requiring public companies to set clawback policies to take back executive compensation based on inaccurate financial statements are important steps in reining in excessive executive pay and can help shift management's focus from short-term profits to long-term growth and stability.
Why Change Is Needed:In this country, you are supposed to be rewarded for hard work.
But Wall Street has developed an out of control system of out of this world bonuses that rewards short term profits over the long term health and security of their firms. Incentives for short-term gains likewise created incentives for executives to take big risks with excess leverage, threatening the stability of their companies and the economy as a whole.
Giving Shareholders a Say on Pay and Creating Greater Accountability
SEC AND IMPROVING INVESTOR PROTECTIONS
Every investor – from a hardworking American contributing to a union pension to a day trader to a retiree living off of their 401(k) – deserves better protections for their investments. Investors in securities will be better protected by improving the competence of the SEC, creating uniform standards for those providing customers investment advice, and giving investors the right to sue those who commit securities fraud.
Why Change Is Needed:The Madoff scandal demonstrated just how desperately the SEC is in need of reform. The SEC has failed to perform aggressive oversight and is unable to understand the very companies it is supposed to regulate. And investors have been used and abused by the very people who are supposed to be providing them with financial advice.
SEC and Beefed Up Investor Protections
Companies that sell products like mortgage-backed securities are required to retain a portion of the risk to ensure they won't sell garbage to investors, because they have to keep some of it for themselves.
Why Change Is Needed:Companies made risky investments, such as selling mortgages to people they knew could not afford to pay them, and then packaged those investments together, called asset-backed securities, and sold them to investors who didn't understand the risk they were taking. For the company that made, packaged and sold the loan, it wasn't important if the loans were never repaid as long as they were able to sell the loan at a profit before problems started. This led to the subprime mortgage mess that helped to bring down the economy.
Reducing Risks Posed by Securities
Municipal securities will have better oversight through the registration of municipal advisers and increased investor representation on the Municipal Securities Rulemaking Board.
Why Change is Needed:Financial advisers to municipal securities issuers have been involved in "pay-to-play" scandals and have recommended unsuitable derivatives for small municipalities, among other inappropriate actions, and are not currently regulated.
Better Oversight of Municipal Securities
CREATING A 21st CENTURY WORKFORCE FOR 21st CENTURY REGULATORS
This bill will take a look at a key hurdle for creating competent regulatory agencies: competent staff.
Why Change is Needed:The new proposals will create three new agencies – the Financial Institutions Regulatory Administration, the Agency for Financial Stability and the Consumer Financial Protection Agency – each posing staffing challenges that will determine the regulators' success or failure.
A Better Work Environment to Attract Better Staff:The bill will set up a panel to look at the staffing needs of the three new agencies based on the successful panel that helped the IRS to improve their hiring practices. The advisory panel will last only three years to see that these agencies are able to attract, cultivate, and retain competent staff qualified to regulate complex, 21st century financial institutions.
Click here to return to FBIC homepage