Posted on 07 Jun 2010
As Congressional negotiators begin this week to merge two bills overhauling the financial system, the White House wants them to reach an agreement before President Obama leaves for a Group of 20 meeting this month in Toronto.
The administration has tried to use the summit meeting to foster a sense of urgency among lawmakers. It thinks a deal would give Mr. Obama greater leverage in efforts to persuade other countries to support proposals like a global bank tax and higher capital standards for the largest financial institutions. The higher standards are part of the legislation but would require international coordination.
“We’re on the verge of legislating sweeping reforms of our financial system, to fix what was broken in our system, recognizing that those failures in the United States were very consequential to the world as a whole,” Timothy F. Geithner, the Treasury secretary, said last week before leaving to meet with G-20 financial ministers in South Korea.
But first, Congressional negotiators must resolve substantial differences between the bills, which together total more than 3,000 pages and amount to the most extensive rewriting of financial regulations since the Great Depression. The process will begin formally on Thursday with a meeting of more than 20 lawmakers from both parties and both houses of Congress.
“I think it is very important for the stability of the economy for this to get done,” said Representative Barney Frank of Massachusetts, a Democrat and the chairman of the House Financial Services Committee. He said that Rahm Emanuel, the White House chief of staff, had urged him to produce a consensus report by June 24, when Mr. Obama is expected to leave for Toronto.
A White House spokeswoman, Amy Brundage, said over the weekend that Mr. Obama was looking forward to discussing the financial overhaul at the G-20 meeting and reiterated that “he hopes to sign financial reform into law by July Fourth.”
Perhaps the foremost question is whether to force giant banks to spin off their lucrative operations trading derivatives, the complex instruments that were at the heart of the financial crisis. Adding a political twist, the author of that provision, Senator Blanche Lincoln of Arkansas, faces a Democratic primary runoff on Tuesday.
No matter the outcome of the runoff, the provision faces substantial opposition, not only from Wall Street but also from regulators like Ben S. Bernanke, the Federal Reserve chairman, and Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. Also, the administration does not support it.
In a final, ferocious round of lobbying, big banks are also trying to influence negotiations on whether to curb the fees that retailers must pay when customers swipe credit and debit cards — as the Senate bill seeks to do — and how strictly to impose a ban on proprietary trading, or banks’ making market bets with their own money.
The Senate bill directs regulators to impose such a ban, known as the Volcker Rule, after a period of study; the House version would merely permit the Fed to ban proprietary trading if it threatened the overall stability of the financial system. Most banks prefer the House version.
Supermarkets and other merchants support the Senate bill’s limits on the so-called interchange fees on card transactions, which the House bill does not address. Banks say the limits would result in fewer options for consumers, particularly in low-income areas where debit cards are commonly used instead of credit cards.
The House passed the legislation in December, and the Senate approved it last month. Many in Congress will return on Monday from their Memorial Day recess with an appetite to complete the legislation. Mr. Frank has vowed to get a final bill to Mr. Obama’s desk before Independence Day. He called June 24 a target, not a deadline.
In a May 27 letter, Senate Republicans, led by Senator Richard C. Shelby of Alabama, the top Republican on the banking committee, told Democrats, “The conference’s work is too important to be bound by artificial deadlines.”
The Senate negotiators are seven Democrats and five Republicans; the chief negotiator is Senator Christopher J. Dodd of Connecticut, a Democrat, who is the chairman of the Banking Committee.
Mr. Frank has recommended a list of House negotiators and said he expected Speaker Nancy Pelosi to complete the list on Wednesday. Then, according to the Democrats’ plan, the committee will meet on Thursday and have six more days — June 15, 16 and 17 and 22, 23 and 24 — to complete its work. The panel will “start with the Senate bill as the base text,” Mr. Frank said.
He predicted that much of the negotiating time would be spent on three areas: Mrs. Lincoln’s derivatives provision, the Volcker Rule and the interchange fees that retailers pay issuers of credit and debit cards. He said that the Senate version was better at tightening restrictions on derivatives trading and that he favored “some very tough form of the Volcker Rule,” but he stopped short of endorsing the Lincoln provision.
Lawrence H. Summers, the director of the National Economic Council, and one of his deputies, Diana Farrell, met on Wednesday with liberal advocacy groups as part of a White House strategy to keep pressure on Congress.
“Summers’s message for us was really, keep up the fight,” said Heather C. McGhee, the Washington director of Demos, a liberal policy organization, who was part of the meeting.
Although both versions of the legislation are modeled largely on a blueprint the Obama administration put forward last June, and were approved despite stiff Republican opposition, cheering among Democrats has been muted.
“This bill is on track to being the most misguided piece of federal banking regulation in the past half-century,” said Richard S. Carnell, a Fordham law professor who was assistant Treasury secretary for financial institutions during the Clinton administration.
Mr. Carnell, a Democrat, said the legislation mostly gave a Congressional blessing to powers that regulators possessed, but failed to exercise, before the crisis. “If regulators didn’t have the fortitude to do unpopular things before, why will they have the fortitude to do them now?” he asked.
While the two bills would empower the government to seize and dismantle financial institutions on the verge of failure, Robert A. Johnson, director of the economic policy initiative at the Franklin & Eleanor Roosevelt Institute, and a former Senate economist, said they “stop short of insulating the taxpayer from further bailouts, which is what Dodd and the Obama administration have advertised as the capacity of those powers.”
Another part of the legislation would create a consumer financial protection agency. Under the House bill, the agency would stand alone, while the Senate bill would put the agency within the Fed. In either case, the agency would have an independent director and budget. The House version of the bill would exempt auto dealers from the ambit of the new agency; the Senate bill does not contain the loophole, which Mr. Obama opposes.