Standoff threatens financial reform effort

WASHINGTON -- The most sweeping overhaul of U.S. financial regulation since the Great Depression is in trouble, along with its centrepiece plan for an independent consumer watchdog.

In the face of strong industry push-back, Senate banking committee chairman Christopher Dodd conceded yesterday that time is running out and Democrats will now go it alone - with or without Republican support. "It is still our hope to come to agreement on a strong bill all of the Senate can be proud to support very soon," said Mr. Dodd, a Democrat from Connecticut.

In the meantime, he said he would table a new bill next week that only partly reflects what Republicans want.

But analysts aren't convinced Mr. Dodd will be able to garner the single opposition vote he needs to push the reforms through the narrowly divided Senate now that Republican leaders aren't on board.

U.S. President Barack Obama made the Consumer Financial Protection Agency the key to an overhaul of the regulatory regime, which failed to avert the near-collapse of the financial system in late 2008, followed by a wave of bailouts and bank failures.

As the severity of the crisis faded, the momentum for reform ebbed and opposition galvanized.

"I am very skeptical that the financial system can be made less dangerous and costly to society as a whole, absent root and branch reform, which means much more aggressive oversight, with the objective of regulating activities that are critical to advanced capitalist economies," said Yves Smith, a veteran Wall Street financial consultant and author of the Naked Capitalism blog.

"We clearly lack the political will to do so now. In the meantime, we will be subjected to various reform proposals which leave the system ... intact," she said.

Senate Democrats and Republicans had agreed in principle to establish a new consumer agency that would regulate mortgages and other consumer financial products. But the two sides have been unable to figure out how much power to give the agency and whether to house it inside an existing entity, such as the Treasury department or the Federal Reserve.

"The Treasury, the Fed and Office of the Comptroller of the Currency are notoriously bank-friendly," Ms. Smith said. "Think they are going to do anything to seriously inconvenience their charges? Not on your life."

The two sides are also at odds over the broader regulatory role of the Fed, which currently takes the lead in overseeing the country's largest, systemically important financial institutions.

The banking industry has vigorously fought the proposal, arguing that it would interfere with the main job of financial regulators - ensuring the health of the country's banks.

The reform package, which the House of Representatives passed in December, also includes measures to shutter large banks on the verge of collapse, a council to watch for emerging threats, real-time analysis of banks and their counter-parties as well as greater transparency of credit default swaps and other over-the-counter derivatives.

A separate effort is under way to prohibit deposit-taking banks from owning or investing in hedge funds or private equity firms, and from making risky bets on their own accounts. But the so-called Volcker rule, named after former Fed chairman Paul Volcker, is facing stiff opposition and isn't expected to be part of Mr. Dodd's revised legislation.

Republicans blamed the standoff on the bitter battle over the Obama administration's health care reform plan. They said the Democrats' heavy-handed tactics are making it tough to get virtually anything through the divided Senate.

Republican Sen. Bob Corker of Tennessee, who had been leading talks on a compromise financial bill, said he was disappointed at the turn of events.

"If we cannot do this in a bipartisan way, and I still have hope that we will, we can't do anything any more in the United States Senate," Mr. Corker told reporters.