Counterfacturals are fun in politics: what if Democrats had introduced a comprehensive, sweeping financial regulation reform bill a year ago? After trying to forge a bipartisan consensus with Republicans on his committee, Sen. Chris Dodd will drop a bill today that will change the way banks and business do banking and business. It has four major components, each sold separately, in terms of their intended political audience.
There's corporate governance -- giving shareholders proxy votes to influence executive pay and the selection of boards of directors -- this is a pet issue of Sen. Chuck Schumer's. Critics will note that the new "powers" will be non-binding, but corporations will certainly have to take them into account, perception-wise.
There's the Consumer Finance Protection Agency, which would pull together the interactions between lending institutions and individuals and regulate them. The Federal Reserve apparently won their lobbying battle to keep the CFPA within the Fed. It would seem, on first glance, that they're going lot more under this bill: Dodd would strip the Fed of their oversight of smaller banks - those with less than $50 billion in assets -- and give the regulation of these banks to a new facility located in the Office of the Comptroller of the Currency, if they're national, and if they're state-chartered, to the FDIC. However, the bill, so far as we can tell, would give the Fed more direct authority to actually regulate. Companies like AIG could fall under its umbrella, even though AIG was in the reinsurance business, not the banking business.
That the CFPA remains in the Fed will probably turn out to be the most politically contentious issue within the Democratic Party. Barney Frank, the chair of the House Financial Services Committee, was "incredulous
" that Dodd was even considering this architecture given the political standing and perceived institutional biases of the Fed. Some of its regulations and rule-writings will be subject to a veto by a new regulator's council -- albeit a supermajority veto. A big question: how much true autonomy will this agency have? How much should it have?
Point three is the new resolution authority -- that is, the end of "too big to fail" institutions, as judged by a select panel of top regulators and cabinet members. (This is a compromise between those who see bigness in terms of assets versus those who see bigness as a function of how interlinked the entity is with the rest of the economy.) There wouldn't be a new presidentially appointed overseer of this council. Another inflection point: how much power will this council have? Will they be able to overturn decisions easily? What criteria will they create?
Point four is significant new regulations on derivatives, but it is not clear how many companies who currently trade these instruments will be subject to them. Reuters categorizes the exemptions as "narrow," but you can bet that lobbyists and lawyers will try every trick in the book to keep their firms away from these regulations.
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