Initial Thoughts on Dodd's New Financial Reform Proposal

Senator Christopher Dodd (D-CT) unleashed his new 1,336-page financial regulation proposal (.pdf). I listened to his press conference, read the summary (.pdf) and just begun going through the bill itself. My first reaction: it sure does look an awful lot like the House bill (.pdf), passed in December.

Dodd's original draft, revealed in November was far more aggressive compared to what he proposes this week. And it was more ambitious than the House bill as well. The new bill, however, may be even weaker than the House's version. Let's go through a few highlights:

Consumer Financial Protection Agency (CFPA)

This is a good place to start because Dodd's version a little different from what's in the House bill -- but even it isn't that different. As the rumors indicated, the Federal Reserve will house the CFPA. But other than that technicality, it's almost identical to what the House intended from what I've read so far (which, admittedly, is incomplete).

Dodd's CFPA is approximately as independent as the House's version. In both cases, the president would nominate the head of the CFPA, confirmed by the Senate. In both versions the Federal Reserve System would pony up the money to fund the CFPA, though the specific amounts of funding differ a little. In each proposal, the CFPA will only have authority over banks and credit unions with assets over $10 billion. I need to check to see what specific differences exist, but both appear to have various exclusions for certain types of finance companies.

Volcker Rule

Does the so called Volcker rule proprietary trading ban make it into Dodd's proposal? Only insofar as it did into the House's proposal. You may recall that was passed way back in December, before the president even sent the Volcker proposal to Congress. But the House version did include a provision which would ban prop trading if a study determines that doing so would be a prudent step towards stronger systemic risk protection. The new Senate proposal contains the same such provision.

Both versions also contain some credit concentration limit language, which is the second part of the Volcker rule. I'll look at this more closely as I dig in.

Systemic Risk Council, Fed as Regulator

Dodd's original proposal would have created a new systemic risk regulator. He gave that up. Instead, he would mostly mimic the House's proposal here as well. Like the House he intends to establish a systemic risk council, led by the Treasury Secretary. He would also give the lion's share of systemic risk enforcement power to the Federal Reserve.

Resolution Authority

There were some reports, during the negotiation process between Dodd and Republicans that the new resolution authority's power could be in jeopardy. In fact, it looks like Dodd, again, went essentially with what the House passed. A council of regulators would decide whether to resolve a firm. That resolution process would be handled by the FDIC.


Another area where Dodd was more aggressive in his November proposal was with securitization. He wanted issuers and securitizers to retain 10% of the risk. The House, however, thought 5% was enough. Now, Dodd agrees.

Say on Pay

Like the House proposal, the Senate version would give shareholders a non-binding vote on executive compensation.


One area where the two proposals may disagree a bit is derivatives. But that's mostly because Dodd's version hasn't finalized the derivatives regulation language yet. In his summary Dodd actually states the following about his derivatives section:

Today's bill largely reflects the November draft. Senators Jack Reed (D-RI) and Judd Gregg (R-NH) are working on a substitute amendment to this title that may be offered at full committee.

In other words, I wouldn't even bother analyzing this portion of the bill yet, because it's to-be-determined. Last week, I mentioned that Senator Corker (R-TN) said that Reed and Gregg were still several weeks away from finalizing their derivatives regulation proposal. I expect that means that the amendment will be offered on the Senate floor, since Dodd hopes to get this out of committee in just a week's time.

Overall Thoughts

Frankly, I'm a little surprised how closely Dodd's bill follows the House's version. But if it passes, that should make conference a breeze! But that Senate vote won't be easy. Even after it gets out of committee, Dodd needs to sway at least one Republican to vote for the bill, which might not be easy, given that Senate Republicans view his effort as rushed after he abruptly ended bipartisan compromise. Indeed, it could even be difficult to get all Democrats on board. The House version only passed by five votes, even though the House had a 40-seat majority. If the same probability holds in the Senate, then that would equate to eight Democratic Senators voting against. Clearly, that 51 won't get the bill past the 60-vote hurdle Dodd needs for a floor vote. He has a difficult road ahead.

If you want to read my writings on the Dodd original bill from November, they can all be found here:

Dodd's New Financial Regulation Bill
The Proposed Agency For Financial Stability
The Senate Plan's Resolution Authority
A Few Notes On The Proposed Super Bank Regulator
Senate Slams Securitization
The Senate's Disappointing Rating Agency Reform Proposal

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