Financial Regulatory Reform Bill

On Wednesday, the Senate began its formal debate of amendments to the Restoring American Financial Stability Act of 2010 with nearly unanimous support for an amendment by Senator Barbara Boxer (D-CA) clarifying that taxpayers would not bear any losses from the liquidation of bankrupt firms. The Senate moved to consider a bipartisan proposal by Senators Dodd (D-CT) and Shelby (R-AL) to strip the bill of a $50 billion fund which would be filled upfront by the financial industry, that would cover the cost of closing down failing firms. Under the Dodd-Shelby deal, the Federal Deposit Insurance Corporation would liquidate faltering firms by borrowing money from Treasury to cover initial costs. The government would recover the costs by selling off the firm’s assets, with creditors and shareholders incurring losses. Other large banks could be assessed to pay for additional costs as a last resort. Also, creditors of a failing firm would be forced to pay back the government any money they received above what they would have gotten under a bankruptcy proceeding. Any seizure of a large, failing firm would require court approval to ensure that the government not shut down a company inappropriately. In addition, Congress would have to approve the use of federal debt guarantees, and regulators also would be able to ban management and directors of failed firms from working in the financial sector for a minimum of two years.

After voting on the Dodd-Shelby changes, lawmakers quickly approved two amendments put forward by Senator Olympia Snowe (R-ME), aimed at preserving the ability of small-business owners to use their homes as collateral and lightening regulatory burdens on small banks. The Senate then passed an amendment from Senator Jon Tester (D-MT) and Senator Kay Bailey Hutchison (R-TX.) that instructs the FDIC to set the premiums that banks pay based on an assessment of their overall risk.

After approval of these bipartisan measures, the Senate moved to consider more contentious amendments. Senator Shelby (R-AL) offered an amendment to curb the reach of the new consumer protection agency. The amendment was defeated along party lines. Under the Shelby plan, the FDIC would have had to sign off on the consumer rules, and funding for the division would come from fees assessed on nonbanks. And unlike the underlying bill, Republicans would maintain federal pre-emption of state consumer protection laws, which would prevent the financial industry from having to beat back proposals in 50 different states.

The Senate then moved to consider an amendment by Senator Bernie Sanders (D-VT) which originally called for a “comprehensive” audit of the Fed’s activities, most of which historically have been kept from public view. But a last-minute lobbying effort by White House, Treasury and Federal Reserve officials won a compromise to limit the scope of the one-time audit to only the Fed’s emergency lending to banks, allaying concerns that a review would have interfered with interest rate decisions.

The Senate had been set to vote on the Fed amendment late Thursday but Republicans requested a delay until at least Tuesday. The original Sanders’ Fed amendment had gained broad support in the Senate and a version is included in the House legislation. But if it had survived the Senate intact, President Obama might have been forced to veto the entire bill. Bernanke sent a letter to Banking Committee Chairman Dodd Thursday saying he had “deep concern” that expanding audit powers to the General Accounting Office would “seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.”

Late Thursday night the Senate also considered and rejected an amendment by Senator Sherrod Brown (D-OH) that would have imposed leverage and liability limits on bank holding companies and financial companies, as well as an amendment by Senator John Ensign (R-NV) which would have amended the definition of the term “financial company” for purposes of limits on non-deposit liabilities. The Senate will resume consideration of amendments Monday with over one hundred filed, although not all will be considered.

Washington Responds to Stock Market Plunge

On Thursday, when the Dow plunged before recovering, officials in Washington scrambled for information as to the extent and causes of the problem. Sources indicated that Treasury Secretary Timothy Geithner and White House economic advisor Larry Summers briefed President Barack Obama immediately. President Obama spoke on Friday about the April jobs number and also discussed the market’s plunge saying “regulatory authorities are looking into Thursday’s wild swings in the stock market with an eye toward protecting investors and preventing something like that from happening again.” The President also said he spoke with German Chancellor Angela Merkel about the economic situation in Europe saying they agreed on the need for a strong response by the affected countries and the international community. Late Thursday, a key congressional committee said it will investigate the causes of the flash crash, too. Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, announced that he will hold a hearing on Tuesday, May 11 at 3:00 p.m. The Securities and Exchange Commission and the Commodity Futures Trading Commission released a joint statement reporting “[t]he SEC and CFTC are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon.”

April Jobs Report Released

On Friday, the Labor Department said nonfarm payrolls rose by a higher than expected 290,000 jobs last month — the largest gain since March 2006. However the unemployment rate increased to 9.9% during April. Economists were expecting it to remain at March’s 9.7% level. Total government employment, which includes state and local jobs, rose by 59,000, helped by the influx of the Census workers. The decennial Census accounted for 66,000 of the employment boost last month. As those jobs will be lost in the second half of the year, some economists cautioned not to read too much into the headline figure. Census hires in March were 48,000. Beyond government jobs, the report showed that the private sector created 231,000 jobs. Manufacturing continued to trend up, rising by 44,000. The industry, which is leading the economy’s recovery, has added 101,000 jobs since December. Construction, a sector that has been suffering, added 14,000 jobs in April. The U.S. Federal Reserve expects the unemployment rate to remain above 9.0% until the end of 2010 as the economy continues to recover only slowly. Average hourly earnings of all employees rose by just $0.01 to $22.47 in April. Earnings of private production and nonsupervisory employees rose $0.05 to $18.96.