Late last year, the House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, a regulatory reform package aimed at protecting consumers and taxpayers from Wall Street excess, but the Senate has yet to approve its own regulatory reform bill. Last month, Senate Banking Committee Chairman Chris Dodd (D-CT), who is leading the Senate negotiations, reached an "impasse" with the committee's ranking member, Sen. Richard Shelby (R-AL).ÊSen. Bob Corker (R-TN) restarted negotiations, saying that regulatory reform is "too important to fail," and last week, Corker said that a deal with Dodd was "real close."

The main sticking point that remains in the process is whether or not to create an independent Consumer Financial Protection Agency (CFPA) like the one included in the House bill. While Dodd's initial bill included a CFPA, Corker has called a new agency a "non-starter" and Shelby has characterized it as "folly and dangerous." The banking industry has also been lobbying heavily against the CFPA, claiming that it will drive up the cost of credit. So instead, Dodd is reportedly looking to create a consumer protection division inside of another bank regulator. The Senate has also not moved on an Obama administration proposal to prevent banks from trading with federally insured money.

COMPROMISED CONSUMERS: The goal behind creating an independent CFPA is to ensure that there is a body within the regulatory structure focused solely on consumer protection -- as the rest of the bank regulators make bank "safety and soundness" their primary concern -- and to crack down on the pernicious lending practices that helped precipitate the financial crisis. Dodd's initial compromise proposal, which the Republicans rejected, placed a new consumer division inside the Treasury Department. Instead, Corker proposed placing it insideÊthe Federal Reserve. That proposal, and Dodd's willingness to examine it, represent quite a turnaround from the previous few months, when the Fed was the subject of heavy criticism from lawmakers on both sides of the aisle. Dodd himself has said that the Fed was "an abysmal failure" at consumer protection, "which failed for over 14 years to put an end to the predatory mortgage lending practices that led to the financial crisis." The "Fed option" has been met with skepticism from Democrats on the banking committee and consumer advocates. "In my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle. I am very leery of any consumer regulator being placed inside the Fed," said Sen. Chuck Schumer (D-NY). "Why put consumer protection back in the Fed after it's been so woefully neglected?" asked Sen. Jeff Merkley (D-OR). House Financial Services Chairman Barney Frank (D-MA), meanwhile, called the proposal "a joke," and said that he wouldn't bring the Senate bill to a vote if the "Fed option" remained.

REPUBLICAN VETO POINTS: As Demos' Heather McGhee said, leaving consumer protection responsibilities with the Fed "would codify consumer protection's secondary status in federal financial regulation." And, in fact, the banking industry considered the proposal a "victory" that "alleviates their concern." "Regulation of the products should be connected to the regulation of the bank," said Scott Talbott, senior vice president of government relations for the Financial Services Roundtable, which represents the country's largest financial firms. Sen. Judd Gregg (R-NH) wants to go even further, saying that he would only agree to support regulatory reform if the Federal Reserve Chairman was given veto power over the consumer division's rule-writing. Shelby supports Gregg, even though he had previously said that the Fed's "poor oversight of our financial institutions and markets helped produce the greatest economic crisis this country has experienced in eighty years." Dodd, however, has said that the consumer division must have rule-writing authority and an independent source of funding, both of which are indeedÊcritical if the agency is to beÊeffective. "Consumer abuses were one of the root causes of the financial crisis and regulatory reform legislation should address this problem," said Andrew Gray, a spokesman for FDIC Chairman Sheila Bair. "[T]he ideal way to do this is through an independent agency with the power to write rules for the banks and non-banks alike."

VOLCKER ON THE SHELF?: While the CFPA has been contentious, both parties seem united in wanting to shelve a proposal by the administration aimed at reining in banks' risky trading. The administration's "Volcker rule" would bar banks from trading for their own benefits with federally insured dollars and mandate that no bank hold more than ten percent of the liabilities in the financial system. However, Dodd dismissed the idea, saying that "I can't write regulations," and Corker said the proposal is "just not helpful." Outside of the Senate, meanwhile, the proposal has garnered significant praise. Five former Treasury secretaries said that it is "a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities." Former Citigroup CEO John Reed added that it would "limit the propagation of [bank] failures." The rule also gained the backing of one currentÊbank CEO last week, with Citgroup's Vikram Pandit saying that "banks should operate as banks, focused completely on serving their clients." "I donÕt believe banks should use capital to speculate that way," Pandit said, when asked about the kind of trading the Volcker rule is meant to curb. Last week, Dallas Federal Reserve President Richard Fisher advocated a more radical approach to the banks, saying that financial firms considered "too big to fail" should be broken up "into ones of more manageable size." "Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach," he said. "And this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis."

(The Progressive Report)