Bloomberg
Dodd Bill Empowers Regulators to Limit Size of Financial Firms
March 15 (Bloomberg) -- Senator Christopher Dodd unveiled legislation that empowers regulators to break up large financial firms, ban proprietary trading, and oversee hedge funds and derivatives, aiming to enact the most sweeping rules overhaul since the 1930s.
Dodd would let the Federal Reserve force firms to divest holdings if they pose a âgrave threatâ to the economy, make hedge funds overseeing more than $100 million register with regulators and require central clearing for derivatives, according to a summary released today.
âCompanies simply shouldnât be that big or that complex,â Dodd, a Connecticut Democrat who leads the Senate Banking Committee, said at a Washington news conference. âAnd we will discourage that through the new capital requirements and other strong supervisory protections.â
Doddâs bill, released 18 months after the collapse of Lehman Brothers Holdings Inc., attempts to implement President Barack Obamaâs call for financial reform. Skeptics said itâs a watered-down version of Doddâs earlier bill that gives Obamaâs proposed consumer protection agency too little independence and gives the Fed too big a role after the central bank failed to adequately regulate Wall Street before the credit crisis.
âWeâre making up solutions for problems that donât exist to avoid the challenges that we donât want to address,â Peter Morici, an economist at the University of Maryland in College Park, said in an interview. âThis proposal doesnât solve problems on derivatives, on too-big-to-fail or anything else that led to the crisis.â
Council of Regulators
Doddâs plan creates a nine-member council of regulators led by the Treasury secretary to identify and respond to risks in the financial system. Large bank holding companies that received funds from the $700 billion Troubled Asset Relief Program, including Goldman Sachs Group Inc. and Morgan Stanley, wonât be able to avoid Fed supervision by getting rid of their banks.
The bill would give shareholders of publicly traded companies a non-binding vote on executive pay, grant investors more power to nominate board members and allow pay to be recouped if it was based on inaccurate financial information.
It also includes a version of the Obamaâs so-called Volcker Rule to restrict proprietary trading, and involvement with hedge funds and private equity funds, according to the summary.
âLast Resortâ
The Fed, with a two-thirds vote by the proposed Financial Stability Oversight Council, would be able to require companies to divest holdings âonly as a last resort,â the summary said.
The council can make recommendations to the Fed to impose âstrictâ rules for capital, leverage, liquidity and risk management to make it difficult for firms to grow so big and complex that they endanger the financial system. It could require the Fed to regulate non-bank financial firms that threaten financial stability, ensuring that âthe next AIG would be regulatedâ by the Fed, the summary said.
It gives the Securities and Exchange Commission and Commodity Futures Trading Commission authority to regulate over- the-counter derivatives and requires those agencies to approve contracts before clearinghouses can clear them.
Doddâs plan also requires hedge funds to register with the SEC as investment advisers and provide information about their trades and portfolios to assess systemic risk.
Consumer Protection
The proposal creates a consumer protection agency at the Fed to police firms for lending abuses. The bureau will be led by a director appointed by the president and confirmed by the Senate. It would have its own budget, write rules for banks and non-banks, and examine and enforce rules for banks and credit unions with at least $10 billion in assets.
The proposal aims at strengthening Wall Street oversight after a credit crisis stemming from the collapse of the U.S. subprime mortgage market led to the failures of Lehman Brothers Holdings Inc. and Bear Stearns Cos. and $182.3 billion in bailouts for American International Group Inc.
Obama released a statement today saying he âwill fight against efforts to weakenâ the legislation.
âI will oppose any loopholes that could harm consumers or investors, or that allow institutions to avoid oversight that is important to financial stability,â the president said.
Doddâs plan is a revision of a November draft that he withdrew amid Republican opposition. That draft called for creating an independent consumer agency and a single bank regulator formed by merging the oversight powers of the Fed, Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
The new measure eliminates the OTS, while reducing the Fedâs bank oversight powers by shrinking the number of holding companies under its watch and shifting authority over state banks to the FDIC. The Fed will regulate bank and thrift holding companies with more than $50 billion in assets, while the FDIC would regulate state banks and thrifts of all sizes and holding companies of state banks with less than $50 billion in assets.