With the Senate preparing to take up major financial reform legislation later this week, Senate Banking Committee Chairman Christopher Dodd (D-Conn., pictured), called on recalcitrant Republicans to join in supporting the major regulatory overhaul.
"This comes right down to this basic fact: Whose side are you on?" Sen. Dodd said at a Monday morning press conference in which he and fellow committee member Sen. Mark Warner (D-Va.) participated. The Senate is scheduled to begin consideration of the bill Wednesday.
All 41 Senate Republicans signed an April 16 letter to Senate Majority Leader Harry Reid (D-Nev.) saying they oppose the bill in its current form. The letter alleges that the Restoring American Financial Stability Act of 2010 "allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks."
Not so, said Dodd, in response: The bill ends the concept of allowing financial institutions that are "too big to fail."
Proposed Fund Would Have Banks Cover Cost of Failure
A key sticking point is a $50 billion resolution fund into which banks having more than $50 billion in assets would have to pay. Both Dodd and Warner said that the idea of a pre-funded resolution fund was originally suggested by Republicans, and they called for Republicans to come forward with new ideas if they now oppose it. "The door is wide open," Dodd said.
"If there are ideas to do this ... to insulate that taxpayer, that's fine," Dodd said. "This is not a question where I'm rigidly holding onto this," he said.
The proposed fund would cover the cost of unwinding large institutions that fail in an orderly manner so that the broader economy is not damaged. "You need to keep the lights on to do an orderly dissolution of firms," Warner said.
Under the legislation, management of firms that fail would be fired, shareholders and creditors would lose value and assets in the firms would be depleted. With the painful process laid out in advance, there would be adequate reason not to assume that failing firms would be implicitly backed up by the government, Warner said.
Reforms Would Prevent a Repeat of Goldman Sachs, AIG Fiascos
Dodd warned that Republicans should not want to be seen as the party blocking major reforms, especially after the blockbuster Securities and Exchange Commission case filed on Friday against Goldman Sachs (GS) for selling risky mortgage-backed securities without disclosing that the investments were partly selected by a hedge fund manager who made billions of dollars betting that the underlying securities would fail.
"Our bill would have prevented those kind of events from happening," Dodd claimed.
Emboldened by the SEC case, and the possibility that similar cases will follow, Reid has decided to move forward with the legislation, despite Republican opposition. On Thursday, President Obama will travel to New York City, where he is to deliver remarks at Cooper Union calling for passage of the bill. The president also is planning to stump for support for the legislation across the country.
In addition to setting up the resolution fund, Dodd and Warner highlighted provisions in the bill that would require more regulation of derivatives, complex instruments which derive their value from other financial assets. Huge investments by American International Group (AIG) in derivatives went sour as they recession began, which led to the government loaning $85 billion to the firm in 2008 to prevent it from collapsing and taking down the rest of the financial system.
Dodd said that more transparency in derivatives trading is needed to prevent another such occurrence. Republicans argue that the legislation would make it difficult for small businesses and nonfinancial institutions to hedge bets and get credit.
Democrats and Republicans also disagree about whether a powerful new regulator dedicated to protecting consumers is needed. Democrats say a new agency is necessary because no currently existing regulatory agency focuses on consumer needs in the areas of mortgages, credit cards and other types of consumer financing, while Republicans say a new agency would provide overlapping, confusing regulation over the financial industry.
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