U.S. Senate Bank Reform Fight Turns to Consumers, Fed

May 6, 2010

The U.S. Senate’s debate on Wall Street reform shifted Thursday to a running battle over consumer protection and an impending challenge to Federal Reserve secrecy, with small banks also scoring a win.

In the second day of voting on the most sweeping overhaul of financial regulation since the Great Depression, the Senate approved an amendment that would force big banks to pay more for deposit insurance and let smaller banks pay less.

The measure, approved by a vote of 98-0, reflected the increased clout of small banks on Capitol Hill since the 2008-09 financial crisis, which has deeply damaged the political standing of big banks and Wall Street.

Congress is undertaking a major rewrite of the financial rulebook to try to make banks and capital markets less prone to financial upheaval. The future profitability, risk capacity and growth potential of financial firms hangs in the balance.

The Senate made progress on its massive regulatory reform legislation on Wednesday, approving amendments to create a new protocol for dismantling distressed financial firms, and to bar use of taxpayer funds to bail out financial institutions.

Final approval of the 1,600-page reform bill was expected within two to four weeks, but thorny disputes loom ahead, with nearly 100 amendments in circulation on a range of topics.

The Democratic reform bill calls for creating a financial consumer protection watchdog bureau within the Federal Reserve. It would regulate mortgages, credit cards, payday loans and other products.

These duties are now scattered across seven government agencies that have paid consumer protection scant attention.

The spread of subprime mortgages in the real estate bubble that preceded the crisis showed that consumers need to be better protected from aggressive lenders, Democrats say.

But Republicans say the Democrats’ consumer watchdog proposal would impose more compliance costs and red tape on small businesses including orthodontists and florists.

Major financial firms’ credit card and mortgage profits could also be threatened by a consumer protection watchdog.

Senator Richard Shelby, the top Republican member of the Senate Banking Committee, is offering an amendment to put the watchdog in the FDIC, not the Fed, with less independence.

OBAMA HITS GOP AMENDMENT

President Barack Obama said on Thursday the Republicans’ counter-proposal would “gut consumer protections,” and urged lawmakers to reject it. “I will not allow amendments like this one written by Wall Street’s lobbyists to pass for reform,” Obama said in a written statement.

Senator Christopher Dodd, the Democratic chairman of the banking committee, criticized the Shelby amendment.

“It’s like they want to create a police department that’s only allowed to enforce laws against littering,” Dodd said.

A vote on the amendment was expected later on Thursday.

Along with Wall Street and the big banks, the Fed has come under heavy fire since the crisis, with many lawmakers blaming it for failing to detect and head off excesses in the system.

Senator Bernie Sanders wants to amend the regulatory reform bill to open the U.S. central bank to broader congressional audits, and force it to disclose information about its role in the 2008-09 Wall Street bailouts.

The Fed has fought to block the amendment.

Sanders, an independent who votes with Democrats, said in an interview on the cable TV channel C-SPAN Thursday that the Treasury Department has been working against his measure, as well.

Sanders said he expected a vote on his amendment as soon as Thursday and he urged senators to take a stand against “the huge money and pressure” being deployed against his proposal.

“This amendment does not take away the ‘independence’ of the Fed and does not put monetary policy into the hands of Congress,” he said on the Senate floor on Wednesday.

The Fed, which has taken unprecedented actions to battle the financial crisis and deep recession, has worked fiercely to protect its tradition of secrecy, warning of the potential for political interference in its core monetary policy mission.

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