Guest Post: Senator Dodd has Introduced a Sweeping Financial Reform Bill. Please Help Me Figure Out If Its Good or Bad, and What Its Missing

By George Washington of Washington’s Blog.

A source on the Hill sent me the following summary of Senator Dodd’s proposed financial reform bill.

My source notes:

The summary leaves out Sections 1201-1204, which contain serious changes to the Federal Reserve bank structures, transparency elements, and restrictions on 13(3).

Comments and observations are always welcome. Dodd said at the press conference that this is a discussion draft, and that there will be room for comments and feedback in the next few weeks. The markup will begin in the first week of December.

This is a fluid process and I encourage you to speak out now on the process, with as much specificity as possible.

The full 1,136-page bill can be viewed at the bottom of this post.

I’m too busy to really read the summary, let alone the full bill.  Please help me figure out what is good, bad or just plain missing, and then let’s all phone our senators.

Here is the 11-page summary:

Senate Committee on Banking, Housing, and Urban Affairs, Chairman Chris Dodd (D-CT)

Contact: Kirstin Brost/Justine Sessions, 202-224-7391

Summary: Restoring American Financial Stability – Discussion Draft

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.


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. 2


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

Consumer Protections in One Place: Consolidates consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, the Federal Reserve, the National Credit Union Administration, and the Federal Trade Commission.

Independent: Led by a 5 member board with an independent director. The Chairman of the Financial Institutions Regulatory Administration will have a seat on the board.

A Watchdog with Real Teeth: Unites rule-writing, supervision, and enforcement for consumer protection in a single, stand-alone agency with broad authority to investigate and react to abuses as they develop.

Able to Act Fast: With this agency on the lookout for bad deals and schemes, consumers won’t have to wait for Congress to pass a law to be protected from bad business practices.

Educates: Creates a new Office of Financial Literacy.

Regulates Shadow Banking Industry: Levels the playing field for insured banks by regulating the shadow banking industry, such as mortgage brokers and payday lenders, for the 1st time and ensures that companies offering customers the same products receive the same regulatory treatment.

Accountability: Makes one agency accountable for consumer protections. With many agencies sharing responsibility, it’s hard to know who is responsible for what, and easy for emerging problems that haven’t historically fallen under anyone’s purview, to fall through the cracks.

Tougher State Laws: Allows states to pass tougher consumer protections that apply to all lenders, preventing federal regulations from preempting stronger state laws.

Works with Bank Regulators: Coordinates with other regulators when examining banks to prevent undue regulatory burden.

Bases Supervision on Risk: Focuses resources on companies that pose the biggest risk to consumers – mortgage bankers, brokers, finance companies and the largest institutions.


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

Strong and Independent: Governed by an independent chairman, appointed by the President and confirmed by the Senate, to provide insulation from political manipulation. The board will have 9 members including the federal financial regulators and two independent members. The board members’ diverse areas of expertise will strengthen the board’s ability to identify and respond to emerging risks throughout the financial system.

Tough to Get Too Big: Writes increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, imposing significant costs on companies that pose risks to the financial system.

Break Up Large, Complex Companies: Gives the regulators the authority to break up large, complex companies if they pose a threat to the financial stability of the United States.

Close Gaps in Regulation: Identifies unregulated financial companies that pose systemic risk and assigns them to a federal regulator for supervision.

Lean and Mean: Expected to be staffed with a highly sophisticated staff of economists, accountants, lawyers, former supervisors, and other specialists. With just rule writing authority and no direct supervision, the agency can remain small but effective.

Make Risks Transparent: Collects and analyzes data to identify and monitor emerging risks to the economy and make this information public in periodic reports and testimony to Congress twice a year.

Oversight of Important Market Utilities: The Agency for Financial Stability will identify systemically important clearing, payments, and settlements systems to be regulated by the Federal Reserve.



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

Discourage Excessive Growth: Imposes increasingly strict standards for companies as they grow larger, more complex, or more interconnected, including heightened capital, leverage, and liquidity requirements, that ensure these companies have greater resources to deal with financial shocks.

Require Companies Provide Their Own Capital Injections: Requires institutions to issue long-term hybrid debt securities that will provide them with capital during a systemic crisis so failing institutions can provide their own life support.

Funeral Plans: Requires large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and subject to restrictions on growth and activity as well as required divestment if they fail to submit acceptable plans. Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.

Orderly Shutdown: Creates a mechanism for the FDIC to unwind failing systemically significant financial companies through receivership, but not open assistance. Costs of unwinding these companies will ultimately be charged to financial firms with assets of over $10 billion, not to the taxpayers.

Limit Federal Reserve Lending: Updates the Federal Reserve’s 13(3) lender of last resort authority to allow system-wide support for healthy institutions or systemically important market utilities during a major destabilizing event, but not to prop up individual institutions.




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

Independent: Headed by an independent chairman appointed by the President and confirmed by the Senate, a Vice Chairman experienced in state banking regulation, and a board including the chairmen of the FDIC and the Federal Reserve and two other independent members. It will be funded primarily by assessments on the industry.

Single Focused Agency: Combines the functions of the Office of the Comptroller of the Currency and the Office of Thrift Savings, the state bank supervisory functions of the Federal Deposit Insurance Corporation and the Federal Reserve, and the bank holding company supervision authority from the Federal Reserve.

Dual Banking System: Preserves the dual banking system, leaving in place the state banking system that governs most of our nation’s community banks.

Separate Community Bank Division: Establishes a separate division within the new regulator to regulate community banks given the different supervisory issues they pose.

Eliminates Charter Shopping: Stops financial institutions from choosing the easiest regulator, and stops fee-funded regulators from going easy on those they regulate to keep their business.

Increases Accountability: Having a single regulator will mean an identifiable agency is held responsible for shortcomings in the banking system.

Speeds Action, Increases Efficiency: Ends slow, cumbersome, coordinated rulemaking that creates extra red tape and inconsistent enforcement of the same rules by agencies. Overlaps impose unnecessary costs on regulated institutions and their customers.

Focuses the FDIC and the Federal Reserve: The FDIC will focus on its jobs as deposit insurer and resolver of failed institutions, retaining backup examination authority over troubled banks and gaining additional authority to accompany the new agency on examinations of healthy banks and holding companies to ensure it has sufficient information to perform its insurance functions. The Federal Reserve will focus on monetary policy without being distracted by responsibilities for bank oversight and consumer protections. The Federal Reserve will continue to play a key role in assessing financial stability and have guaranteed access to financial institutions and any needed information.



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

Closes Regulatory Gaps: Provides the SEC and CFTC with authority to regulate over-the-counter derivatives so that irresponsible practices and excessive risk-taking can no longer escape regulatory oversight. Uses the Administration’s outline for a joint rulemaking process with the Agency for Financial Stability stepping in if the two agencies can’t agree.

Central Clearing and Exchange Trading: Requires central clearing and exchange trading for derivatives that can be cleared and provides a role for both regulators and clearing houses to determine which contracts should be cleared. Requires the SEC and the CFTC to pre-approve contracts before clearing houses can clear them.

Safeguards for Un-Cleared Trades: Requires traders post margin and capital on un-cleared trades in order to offset the greater risk they pose to the financial system and encourage more trading to take place in transparent, regulated markets.

Market Transparency: Requires data collection and publication through clearing houses or swap repositories to improve market transparency and provide regulators important tools for monitoring and responding to risks.



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

Fills Regulatory Gaps: Ends the “shadow” financial system in which hedge funds and other private pools of capital operate by requiring that they provide regulators with critical information.

Register with the SEC: Requires hedge funds to register with the SEC as investment advisers and provide information about their trades and portfolios necessary to assess systemic risk. This data will be shared with the systemic risk regulator and the SEC will report to Congress annually on how it uses this data to protect investors and market integrity.

Independent Custody of Client Assets: Requires investment advisers to use independent custodians for client assets to prevent Madoff-type frauds.

Greater State Supervision: Raises the assets threshold for federal regulation of investment advisers from $25 million to $100 million, a move expected to increase the number of advisors under state supervision by 28%. States have proven to be strong regulators in this area and subjecting more entities to state supervision will allow the SEC to focus its resources on newly registered 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.

Streamlines the regulation of surplus lines insurance and reinsurance through state-based reforms. 8


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

New Office, New Focus at SEC: Creates an Office of Credit Ratings at the SEC with its own compliance staff and the authority to fine agencies. The SEC is required to examine Nationally Recognized Statistical Ratings Organizations at least once a year and make key findings public.

Disclosure: Requires Nationally Recognized Statistical Ratings Organizations to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record.

Independent Information: Requires agencies to consider information in their ratings that comes to their attention from a source other than the organizations being rated if they find it credible.

Conflicts of Interest: Prohibits compliance officers from working on ratings, methodologies, or sales.

Liability: Investors could bring private rights of action against ratings agencies for a knowing or reckless failure to investigate or to obtain analysis from an independent source.

Right to Deregister: Gives the SEC the authority to deregister an agency for providing bad ratings over time.

Education: Requires ratings analysts to pass qualifying exams and have continuing education.



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

Vote on Executive Pay and Golden Parachutes: Gives shareholders a say on pay with the right to a non-binding vote on executive pay and golden parachutes linked to corporate takeovers. This gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.

Nominating Directors: Gives shareholders proxy access to nominate directors. Providing shareholders a greater role in choosing directors can help shift management’s focus from short-term profits to long-term growth and stability.

Independent Compensation Committees: Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants in order to strengthen their independence from the executives they are rewarding or punishing.

Clawbacks for Executives at Public Companies: Requires that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.

SEC Review: Directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.



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

SEC Reforms: Mandates an annual assessment of the SEC’s internal supervisory controls and a biannual GAO study of SEC management.

Uniform Standards for Advisors: Mandates uniform standards for anyone providing customers investment advice, eliminating different standards for broker‐dealers and investment advisers. Small investors should have uniform protections regardless of the title of the financial professional advising them has.

Best Interest of the Client: Brokers who give investment advice will be held to the same fiduciary standard as investment advisers – they will be required to act in their clients’ best interest.

Aiding and Abetting: Investors will be able to sue persons who help commit securities fraud.

New Advocates for Investors: Creates the Investment Advisory Committee, a committee of investors to advise the SEC on its regulatory priorities and practices as well as the Office of Investor Advocate in the SEC, to identify areas where investors have significant problems dealing with the SEC and FINRA and provide them assistance.

Funding: The self-funded SEC will no longer be subject to the annual appropriations process.


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

Skin in the Game: Requires companies that sell products like mortgage-backed securities to retain at least 10% of the credit risk. That way if the investment doesn’t pan out, the company that made, packaged and sold the investment would lose out right along with the people they sold it to.

Better Disclosure: Requires issuers disclose more information about the underlying assets and to analyze the quality of the underlying assets.



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

Registers Advisors and Brokers: Requires SEC registration for financial advisers, swap advisers, and investment brokers – unregulated intermediaries who play key roles in the municipal bond market.

Regulates Advisors and Brokers: Subjects financial advisers, swap advisers, and investment brokers to rules issued by the Municipal Securities Rulemaking Board and enforced by the SEC or a designee.

Puts Investors First on the MSRB Board: Gives investor and public representatives a majority on the MSRB to better protect investors in the municipal securities market where there has been less transparency than in corporate debt markets.


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.

Here is the full bill:

Sen. Chris Dodd’s Proposed Financial Overhaul Bill

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  1. Pez Dispenser

    It’s bad. Like all politicians seeking power, the more control they are perceived to have, they more political capital they have. Dodd’s reform is a smoke screen, to appease the masses from revolting. To use Homeland Security Advisory System, revolt is at bright yellow (significant risk of revolt). To solve the problem the Fed has caused, there is only one answer: you must end the FED period.

    1. mey

      Can you expand upon the “It’s bad.”? It will be easier to defeat a bill if specific “bad” items can be focused on.

      1. Kevin Sutherland

        By “bad”, Pez Dispenser means it contains regulation. He would prefer to abandon all regulation, end the Fed and sit around and wait for the same crisis we had a year ago to happen all over again but worse.

        Most of the new regulations Dodd is providing seem to be an improvement, but I don’t see why we need to split off the Fed’s regulatory powers into separate organizations. Part of his plan that pops up throughout the summary is “Single Federal Bank Regulator.” However he seems to be splitting off what the Fed does into one organization for consumer protection and one for bank regulation. Seems to be just a reorganization of the furniture to me.

        1. Matthew G. Saroff

          The reason we need to split off the Fed’s regulatory duties is because we cannot afford another Greenspan.

          The Fed is too big, too unaccountable, and too politically powerful.

          As to Fed reforms, I would add term limits, and a prohibition on anyone taking money from the Fed from editing an economic journal for at least 2 years after the money was received (they have captured economic academe too)

        2. S.R.Barbour

          “However he seems to be splitting off what the Fed does into one organization for consumer protection and one for bank regulation. Seems to be just a reorganization of the furniture to me.”

          You say that so disparagingly. It doesn’t take too much thought to imagine a way in which all the furniture in a room can be arranged in such a way to render that furniture and the room itself utterly useless.

          The position of furniture matters. =)

          On the real point here: The task of a system influences the culture of that same system. The culture of the system, in turn, influences how it carries out its duties

          In this sense, the distribution of regulatory duties should be handled in such a manner that they create a self reinforcing task-symbiotic cultural traits. Consider for instance the following tasks:

          *Policing Interbank relations
          *Protecting the consumer
          *Popping financial bubbles
          *Being the ‘bankers bank’
          *Closing insolvent banks

          Some of these feed into one another. For instance ‘being the bankers bank’ is a task that follows well with ‘policing interbank relations’. After all, it is in every bank’s self interest that their fellow banks are not screwing them over, and who better to take on that chore than every bank’s good buddy FrED?

          However, being the ‘bankers banks’, which requires a generally bank friendly attitude, does not mix well with protecting consumers. After all, what’s good for banks and good for consumers are often at ends. Consider if FrED the ‘bankers bank’ had to choose between putting forth new rules protecting the consumer or allowing banks to do something a little ‘unfriendly’ to recapitalizes themselves after a nasty bout of ‘financial crisis’. Which side do you think the banker’s bank would fall on?

          Likewise, if I wanted an institution to be responsible for closing bad banks, I wouldn’t want it to have any particular loyalty to banks at all. Indeed, I’d rather it have an opposing attitude, one that is suspicious of these organizations. Giving that same system the task of popping financial bubbles would go hand and hand and help establish the “I’m your enemy” vicious watchdog culture.

          And, of course, consumer protection is in its own universe as well. Do we want a ‘watchdog’ considering what’s best for consumers? What happens if a dangerous financial product serves a consumer friendly purpose? Or for that matter, the closing of a very bad bank will cut consumers off from their money for months?

          Culture matters.

          Indeed, one of the biggest problems with this crises originated not from a lack of regulatory powers, but instead a refusal to use them.


          I don’t want the bank friendly FED protecting consumers. The FED is just too ‘close’ to the banks. It has too much stake in considering what is for the good of the banks. It is simply, the wrong organization to have such powers.

          I also don’t want the FDIC concerning itself with whether or not ‘closing insolvent bank A will cause a credit crunch’. That’s not the FDIC’s job, they find bad banks and close them in the fastest, cleanest manner possible. The task of handling the economic/liquidity/credit/counter party implications of that action can be handled just fine by a bank friendly FED..

          I most certainly don’t want a real consumer protection agency having to determine whether it should provide liquidity (cash) in exchange for assets to a financial organization that experiences a sudden run.

          So, by all means, rearranging furniture is definitely one of the things I’d look for in a good financial reform bill. Of course, I’m very concerned as to where the furniture is rearranged, I wouldn’t want it to be rendered even more worthless than it has been.

        3. SidFinster

          Abandoning financial regulation is one thing, provided that it has been made clear in advance that if a bank fails, it and its shareholders, counterparties, etc. will be allowed to twist in the wind.

          Risk of unmitigated failure is a disincentive (albeit an expensive one) against excessive speculation, as counterparties and shareholders will presumably police the institution’s activities more closely than they might otherwise. (Better yet would be to require financial institutions to reorganize as “straight” partnerships or possible LPs, but that would be a regulation. Very bad.)

          Using regulation to disincentivize excessive speculation also can work, again, at costs to the firm and to the regulators.

          But what we have now is the worst of both worlds. One where regulation imposes costs but delivers few benefits, and financial institutions are encouraged to gamble with inexhaustible taxpayer money.

  2. craazyman

    I think there’s some good stuff in the Summary posted here, and Senator Dodd certainly seems to have found religion (LOL), but I question how “systemic risk” will be measured and who will do the measuring.

    The same modelers using the same models that said everything was fine in 2007? Posting a guard at the fence is good but if the guard is fast asleep it won’t help.

    And why the contortion to prevent companies from gettting too big to fail? A few bloated beasts might still get big enough to swallow or crush some subset of the regulators, even if only by rolling on top of them. And they might finance enough academics to make a tribe of themselves and make the regulations quaint rather quickly.

    This contortion seems like Ptolemy’s approach to astronomy — clever and convoluted. It’s better a Copernicus come along to simplify it. Why not say “this big and no more”? I don’t know, personally. Maybe there’s a good answer.

    I worry though that — despite the healthy impetus and rhetoric here — that the center of thought on all this seems stuck in the same equations, theories, ideas and general zeitgeists about efficiency and all that. Just a bit of big-time tweaking is all we need. Well, better that than nothing. But a new coat of paint on a rotting wall will eventually chip and crack.

    No, we need to make them really think. Let’s have a “Preamble” to this legislation, like the Bill of Rights is to the Constitution, that sets up the Philosophical ground. What’s a bank for? What’s a financial system for? What is the public good? And what tension is inevitable between money and labor and capital? It might be long winded, but let some Jefferson in Washington take a keyboard to it and see what they come up with. It might be interesting.

  3. winterwarlock

    The motor in this system is dead. It cannot be fixed. The system has to disassembled from the bottom-up, and reconfigured.

    The functional old families can remain, as a counterweight, but all those working the nexus are going to be wards of new system. After several thousand years, they will not be able to adapt, to make the necessary neurological changes.

    The motor worked great, to saturate the planet. Now we need to establish equilibrium, as the foundation for what comes next.

    Busy work is fine, so long as everyone agrees, but it would be better to find something useful for them to do, like being a repository of History, a thread to the past. The longer this nonsense goes on, the more marginal they will become.

    They are in the same position as the monarchy they replaced.

    1. Skippy

      Salute[!] the blow flys young will do their job after the beast is bled out. I just hope the remains fertilize the ground and don’t poison it too much instead.

      Skippy…clutch at the past or grasp onto the future, yep seems that simple to me now. I’m crossing the 2nd half of the bridge before its to late.

    2. winterwarlock

      The states are gearing up for 20% stuctural spending cuts and 10% tax increases, under the cover of federal temporary employment. Once the the old folks see women getting the ax, breaking that social agreement, the time to full disclosure will grow very short.

      On its current trajectory, that demographic wave is going to overshoot the runway by a long, long way, and all that drunken revelry is going to turn into screams, as the rats parachute out of the cockpit.

      Hell hath no fury …

      1. winterwarlock

        all the pensions are just numbers in computers, and the governments are borrowing against confidence in the future of demographic ponzi schemes, which are now clearly excluded from the probabilty distribution entirely, to fund current disributions.

        1. Skippy

          For my age I’m old school, so a *pension*_to me is_when its time to climb a tree and have a long nap.

          For fun I should check the mathematical crypto on 401k = fools, suckers et al, lol.

          Skippy…semi raised by farmers (my GP), that raised kids though the last GD.

          1. winterwarlock

            my pop was old school; didn’t talk to the kids, period, except about the great depression, which he went over in great detail (advantage of having older parents). This is a repeat, with computers. Many people have no idea how dependent they are on them, and those same people think the numbers are real, psychological self-defence I suppose.

            I expect they are going to begin waking from that dream, in numbers, beginning in February.

    3. mad professor

      nice to see you still around, k.

      i was speaking with a friend recently, a child of one of those old families you mentioned, and he was saying the same thing as you. this may be the missing variable that marx did not consider — the necessary counterweight. attention is a currency in its own right, so perhaps no need to mix it in with currency that is also valuing the fruits of all our labor.

      skippy, maybe you have read this already, but your comment brings to mind the ‘hopi elders prophecy’:

      “There is a river flowing now very fast. It is so great and swift that there are those who will be afraid. They will try to hold on to the shore. They will feel they are being torn apart, and they will suffer greatly.
      Know the river has its destination. The elders say we must let go of the shore, push off into the middle of the river, keep our eyes open, and our heads above the water.”

      p.s. of course, this is the prophecy that our fair leader quoted when he exclaimed ‘we are the ones we’ve been waiting for’ the night he was elected. of course, he also forgot to mention the following line: “And do not look outside yourself for the leader.”

  4. Terry

    It is opposed by the Senate Republicans, Barney Frank, the White House, the state banking departments and the state insurance commissioners – it is DOA.

  5. anon

    It is a comparatively good bill — better than the Treasury draft, and better than the House bill. The derivatives stuff alone is a big improvement (making people post more collateral for bilateral contracts…the end-user exemption in Frank’s bill is big enough to drive a truck through it). Terry is right that it will face fierce opposition and it will be very tough to get it through. Tim Johnson is basically an R on a lot of these issues so if the Rs stick together Dodd needs to keep every other D vote on the committee.

    The framework for regulating systemically critical institutions is very thoughtful — don’t label a small of institutions as “Tier 1” and put them under a whole separate regulatory regime, instead have the regulator smoothly adjust prudential standards upwards with the size of a financial institution. That has a lot of advantages. But it leaves enormous discretion to the regulator.

  6. Doug Terpstra

    To paraphrase Dodd: “Gee, I have no clue how that bonus provision snuck itself into that pesky bailout bill. I know nothink!…nothink!” Of course, the stinking elephant in the room, sitting on poor Senator Dodd’s lap, soiling his pinstripes, is campaign bribery. Until that toxin is flushed from the cadaver of our body politic, no amount of tinkering via another bloated 1900-page collection of lobbyists goodies will prevent the wholesale capture of the kleptocracy in short order. It’s time to skin that sacred cow.

    And speaking of bloodletting, where are the prison terms? How can you have compliance without painfully sharp teeth of enforcement. Until prison is a real prospect for fraud, perhaps a 3-strikes-and-life-without-parole for insider trading, misleading quarterlies, or political quid-pro-quo, the masters of the universe will pay their token fines and laugh all the way back to their bank. Anyway a little fear and suffering is good for the soul,and since we’ve corporatized our prisons, it could boost employment and profits.

  7. SeattleMike

    You know it’s bad, it’s Dodd’s bill.

    And let’s all give the “the Right hates regulation” meme a rest. Clinton, Rubin, Summers… they were all for repealing Glass-Steagal, too. Rubing turned it into a post-Treasury career at Citi.

    Does this bill repeal the Gramm-Leach-Bliley and restore some portions of Glass-Steagal? If it doesn’t then it’s a bad bill. Dodd wants to leave his stamp on history and this is his chance, so I duobt it’s going to get shelved and I am positive that the final markup will increase the power of the government over the Federal Reserve and the banking sector as whole, if for no other purpose than to bind them tighter to political hacks like Dodd.

  8. timbo

    Dodd should write a nice regulatory framework for himself. It would probably be quite lengthy. He is a criminal. This isn’t even worth a discussion. What a joke. If the people of Connecticut have a pulse, they’ll vote Peter Schiff in, whatever his shortcomings.

    “Advice is what we ask for when we already know the answer but wish we didn’t.”

  9. tyaresun

    Nov. 10 (Bloomberg) — U.S. Senate Banking Committee Chairman Christopher Dodd’s plan to revamp financial requlation may do little to rein in Wall Street compensation as Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank prepare to pay record bonuses.

    A bill introduced today by the Connecticut Democrat would rewrite financial-industry rules. It includes a non-binding shareholder vote on executive pay, gives investors more power to elect directors and requires that publicly traded companies allow pay to be clawed back, or recouped, if it was based on inaccurate financial statements.

    “For the most part it’s pretty hollow, a toothless tiger,” said Paul Dorf, managing director of Compensation Resources Inc., a pay consultant based in Upper Saddle River, New Jersey. The legislation needs more penalties if the rules aren’t followed, Dorf said today in a telephone interview.

  10. andrelee

    TBTF would have been accurate if the TBTF banks actually had enough capitalization. Which ever bank started taking advantage of that easily led to the others doing the same or even one upping each other in what they could get away with. Someone didn’t do their job, and they had good reason to not do their job. It wasn’t an accident of the ‘culture’, it was a feature. If that is the ‘culture’, if that is still the case in whatever new department, division, entity…that congress comes up with how could we not expect more of the same. ‘Toothless tiger’…more like ‘jaw-less tiger’.

  11. farang

    We need to reinvent the wheel here?

    After the lobbyists from the Bankers get through with having their attorneys craft the fine print, nothing will change.

    Just re-implement the Depression-era regulations Clinton and the Gramm Republicans removed. Fixed.

    End the Fed. Where’s an Andrew Jackson when you need him? Nest of vipers, indeed.

  12. Greg

    The proposed corporate governance changes seem a bit weak.

    I’m not really sure how but it seems that we ought to consider a fundamental restructuring of the public limited liability corporation, especially those that are large and systemically important. We need incentives for shareholders to accept responsibilities of corporate ownership. Boards should be strong advocates for the long term future of firms. “Passive” ownership makes it difficult to hold management accountable, breeds excessive management risk taking, and begs for outlandish compensation.

    Possible additional governance reforms:

    Boards should be independent of management and others (consultants,..) who have financial interests in the firm apart from board pay and stock held. Clearly, CEOs shouldn’t be board chairs.

    Financial accountants might report to the board rather than management, putting the board chair on the hook for financial misstatements rather than the CEO. The idea is to limit the incentives for accountants to misrepresent the financial position of the firm.

    Insisting on proxy access for director nominations is a step in the right direction. Ideally, management would be eliminated from this process.

    If more powerful, independent boards are to be effective, there need to be safeguards to make sure voting shareholders and boards aren’t conflicted by excessive short interests, CDS, interests in competitor firms and the like.

    Incentives for more active shareholder ownership would be hard to implement with the current public firm structure. Perhaps the entire structure needs to be rethought.

  13. Hugh

    The devil is in the details and the executive summary does not, of course, supply them.

    Re the CFPA, I see no requirement to force financial institutions to offer a plain vanilla option. It is also not clear which financial operators are covered (or not) under it.

    The systemic risk regulator looks like a mess. It is described as “lean and mean”. It is supposed to remain small with only rule writing authority. On the other hand, it is supposed to get the authority to break up the TBTF, if they pose a systemic risk (which by definition they do). Can anyone see this agency going up to Goldman or JPM and saying you’re too big and we’re breaking you up? Me either. That this isn’t real is the absence of any mention of Glass-Steagall in his context.

    And it is supposed to have the power to constrain companies’ ability to become too large in the first place in part by setting limits on things like capital and leverage. Does anyone think that A) TBTF will actually follow such rules, or B) dance around them, and C) just how will this “small” agency monitor any of this anyway?

    As for “ending TBTF”, carrying over from the last point, all of this talk about companies coming up with their own funeral plans is baloney. Remember that Lehman was in the black technically one day and something like $637 billion (IIRC) in the hole the next. How do you create a wind down plan for that? It just isn’t serious.

    The more general point about regulatory enforcement is how can we expect regulatory agencies like the CFTC and SEC, or any of the new ones, to actually enforce rules, when legislators like Frank and Dodd are so in the bag for the financial industry? They all look pretty captured to me and I don’t see how any of this uncaptures them.

    The derivatives section has the same problem as the House version. The most dangerous derivatives remain outside the purview of the clearinghouses. Again it is telling that naked CDSs don’t even rate a mention here.

    It is good that hedge funds, municipal funds, and ratings agencies at least rate a mention as does insurance in terms of an issue like reinsurance. But of private equity, and more importantly pension funds and money markets I saw nothing. The executive comp has a clawback but overall remains weak. Giving shareholders a “voice” is a joke. The skin in the game under securitization set at 10% is too low. It should be at least 25%.

    Mostly I see all this as a dodge. The legislature does not need to dump this on to regulatory authorities, some with a long record of capture, other new ones that have as yet no record at all. If Congress doesn’t want TBTF, it can enact laws, like Glass-Steagall. It can tax size and pursue anti-trust actions. It doesn’t have to write vague and contestable authorities for regulators and hope for the best. You want CEOs, upper management, and boards to be more accountable? Make them personally liable, criminally and civilly, for their decisions. That will focus their minds real quick. As for exotics, ban naked CDS and CDO squared immediately. Set a deadline 3-4 years out for companies to clear all of their swaps from their books. And re-institute mark to market, that is if all of these calls for financial transparency are meant to be worth anything. I could go on but Dodd’s proposals are only marginally better than Frank’s and both are far below what is needed.

    1. Doug Terpstra

      You critique the bill as though it were written to fail (WTF) by Dodd’s contributors. Dodd’s proven, unrepentant lie about protecting bonuses in the bailout bill strip him of any credibility whatsoever. It is time for him to retire permanently.

  14. i on the ball patriot

    Bad cop good cop,
    It gets them every time,
    The suckers always believe,
    And it deflects from the crime …

    What the fuck part of “totally non responsive to the will of the people government” is so hard to understand here?

    “Call your senators” — sheeshuz kristay! Call your local fucking Martian and order a pizza.

    Its election boycott time!

    Why change is needed:

    Deception is the strongest political force on the planet.

  15. Mickey, Akron, Ohio

    As Hugh states the “devil is in the details”.

    Without the repeal of Gramm Leach and the reinstitution of Glass-Steagall how will this bill address the inherent logic to grow, making the concentration and centralization of capital in universal banks ever more TBTF, putting the taxpayer at risk. Yes, I saw the funeral provision clause for firms with greater than $10 billion capitalization, but could firms with less than this game the system? And would the funeral and circumstances which necessitate it in the first place be of such magnitude to overwhelm even the best laid plans?

    While the clawback provisions are temtping their enforcement remains to be seen – by shareholders? To work they would require a cultural change – not only among finacial elites but the culture at large. The promotion of long-term stability and investment is laudable, but if institutional investors are dumping your stock every quarter because you didn’t meet their expectations, it’s hard to see how any CEO would last long enough to formulate a long-term investment strategy.

    And another layer of regulation/bureaucracy… It’s the regulators and their willingness to enforce the rules that matter. If the guardians are indoctrinated with laissez-faire and disinclined to enforce/regulate then another layer of regulatory agencies won’t fix the problem. Moreover, how long will it take before they become captive to their clients? Indeed, with the creation of at least three more agencies, FIRA, AFS, and CIPA, in addition to the SEC, FDIC, MSRB, etc. will this further fragment – divide and conquer – the regulatory regime or facilitate the centralization of authority required to regulate the financial industry? At some point, will they find themselves working at crosspurposes, with one not knowing what the other is doing? If all the agencies, existing and proposed, involved are not on the same page then the regulatory regime will not function properly.

    Perhaps it’s me, but by the time this bill emerges out of committee the industry will have cherry-picked and nullified its intent with the fine print. Only lawyers and accountants will benefit [SOX]. While there is an obvious need for regulation, KISS. This proposed bill falls short.

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