Financial Regulatory Reform Bill

Last Wednesday, Republicans agreed to drop objections to a unanimous consent agreement to allow debate to begin after Senator Richard Shelby (R-AL), the ranking Republican on the Banking Committee, announced that his negotiations with Banking Chairman Chris Dodd (D-CT) had reached an impasse over disagreements in the bill. However, Republicans believe the standoff brought them concessions, including the removal of a $50 billion industry-financed resolution authority fund.

Last Tuesday, Republicans offered their own financial services reform plan that would have tightened regulation of Fannie Mae and Freddie Mac, and created a liquidation process of a troubled financial company, paid for by the company’s creditors and its shareholders. The Republican plan would have established a limited consumer protection agency to deal with financial companies, but the agency’s powers would regulate only smaller banks and nonfinancial companies.

Moving forward, Senate Democrats still need to resolve several internal differences, including a section of the bill regulating derivatives. The Senate bill goes farther than the Obama Administration and the Federal Reserve would like in requiring financial firms to spin off their derivatives trading operations. On Friday, FDIC Chairman Sheila Bair urged the Senate to remove the controversial provision saying it could destabilize banks and drive risk into unregulated parts of the financial sector.

The Senate will resume debate on Tuesday, and Senate Majority Leader Harry Reid (D-NV) has promised an open amendment process. Both Democrats and Republicans are preparing hundreds of amendments, including Sen. Ben Nelson (D-NE) who voted with Republicans to block debate on the bill. Nelson has expressed concern about a provision that would require companies such as his home-state’s Berkshire Hathaway to put forward billions of dollars as collateral on existing derivatives contracts. Republicans will need either a majority of Senators or sixty votes to pass amendments to the underlying bill. Senate leaders expect debate to last through the end of next week.

Goldman Executives Appear Before Senate Committee

Appearing before the Senate Permanent Subcommittee on Investigations for the first time since the Securities and Exchange Commission brought fraud charges against him and his employer, Fabrice Tourre, the Goldman Sachs trader at the center of the case, strongly asserted his innocence, insisting repeatedly to a Senate panel that he did not mislead clients in a controversial mortgage derivative product that the SEC alleges was designed to fail. Tourre was among the first of six Goldman executives to testify before the Senate panel last Tuesday. The subcommittee reported that its 18-month investigation found that Goldman helped create the housing bubble by selling securities backed by risky subprime mortgage loans and then profited off that bubble’s bursting by secretly betting against the market. In prepared testimony, CEO Lloyd Blankfein defended the firm and said the allegations were false. The subcommittee has forced Goldman to turn over 2 million pages of documents that Subcommittee Chairman Carl Levin (D-MI) says proves the allegations and shows that Goldman overall made $3.7 billion from the financial crisis. Levin said that the e-mails recovered by the committee contradict Goldman’s claims that it did not make a directional bet on the mortgage market.

New Federal Reserve Appointments Announced

Last Thursday, President Barack Obama announced the appointment of three new Governors of the Federal Reserve Board, which will bring the seven-member board to full strength for the first time in four years. The appointments included San Francisco Fed President Janet Yellen to be Vice Chairman of the Board of Governors under Chairman Ben Bernanke, as well as Sarah Bloom Raskin, Maryland’s Commissioner of Financial Regulation, and Peter Diamond, an economics professor at the Massachusetts Institute of Technology. The three, who are subject to Senate confirmation, would join the board as it considers when to signal an end to its policy of keeping interest rates low for an “extended period.” Yellen, 63, would replace Donald Kohn, who said in March he would step down June 23 after a 40-year Fed career. Yellen would have a four-year term as Vice Chairman and a separate term as a Governor. That term would run through January 2024, while Diamond’s term would end in 2014, and Raskin’s in 2016. Diamond and Raskin would be eligible for reappointment to 14-year terms.

More Information

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
1 202 508 6341 Washington

Kip Wainscott,  Associate Attorney
 1 202 508 6353 Washington