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A Guide to the Tangled Financial Reform Bill

Unusual for legislation under such long consideration, substantive portions of the bill remain the subject of intense debate.

Author:Suleman Shah
Reviewer:Han Ju
Jul 31, 2020
Senate Banking Committee Chairman Chris Dodd (D-Conn.) and Ranking Member Richard Shelby (R-Ala.) discuss financial regulations on Monday. (EPA/
Yesterday evening, Senate Democrats began the procedural endgame to their push to reform the regulation of the financial sector. In a 57-41 final vote, with Democrat Sen. Ben Nelson (Neb.) joining Republicans in opposition (and Majority Leader Harry Reid (D-Nev.) switching his final vote for procedural reasons), the Senate failed to agree to start formal debate of the American Financial Stability Act, crafted by Sen. Chris Dodd (D-Conn.). Democrats need party unity and a Republican crossover to move the bill forward, and the G.O.P. has signaled it wants to sign on to the popular legislation — particularly in light of the public outrage at Wall Street giants such as Goldman Sachs. But working long hours over the weekend and on Monday, the Republican and Democratic sides failed to reach a compromise.
[Economy1]Unusual for legislation under such long consideration, substantive portions of the bill remain the subject of intense debate. Republicans object to central provisions in Dodd’s financial reform bill — and in some cases are advocating for far more stringent measures. Even many Democrats are advocating for adopting stricter rules to prevent banks from becoming too big to fail, too interconnected, or too risky in the future.
When Democrats manage to get a crossover to begin formal debate, a number of central tenets of the bill might change via amendment. In the meantime, significant rewriting might take place before the bill moves forward. Here is a guide to the most important issues at hand, and the key players advocating for changes.
Audit the Fed.Last year, Rep. Ron Paul (R-Texas) introduced a House bill to audit the Federal Reserve. It garnered 313 cosponsors. A similar measure in the Senate, a budget amendment sponsored by Sen. Charles Grassley (R-Iowa), passed95 to 1. But a strong provision did not make it into the final Senate legislation. And with the Federal Reserve’s balance sheet more than double its size before the financial crisis — swollen with $1.1 trillion in mortgage-backed securities purchased from Fannie Mae and Freddie Mac plus toxic assets from failed companies like Bear Sterns — a bipartisan group of senators want to force a thorough independent audit of the Fed’s books. Sen. Bernie Sanders (I-Vt.) is sponsoring an amendment that would open up the Fed to an Government Accountability Office audit. The amendment has the stated support of Sen. Russ Feingold (D-Wis.) and Sen. Jim Bunning (R-Ky.), among others, and is expected to come up.
**End too big to fail by capping bank size. **Sanders also wrotea measure to break up the banks that failed to make it out of the Senate Budget Committee last week. But the notion of breaking up big banks is a popular one, and sure to come via amendment. Dodd’s bill as currently written gives the Federal Reserve and other regulators the ability to seize and break up financial firms it deems systemically important and systemically dangerous. But that is meant only as a “last resort,” and members of both parties consider the language too wan. Sen. Sherrod Brown (D-Ohio) and Sen. Ted Kaufman (D-Del.) last week introducedthe Safe Banking Act, which they plan to offer as an amendment to the Dodd bill. It mandates hard leverage and size caps on banks and other financial firms; limits commercial banks’ assets to 2 percent of GDP and non-banks’ assets to 3 percent; and imposes a 16-to-1 leverage cap, among other provisions.
**Reinstitute Glass-Steagall provisions. **Another popular way to effectively limit bank size is to return to the Depression-era Glass-Steagall rules. The Glass-Steagall Act, mostly repealed in 1999, prevented banks from having both commercial and investment banking arms — as, for instance, J.P. Morgan Chase does today. Sen. Maria Cantwell (D-Wash.) and Sen. John McCain (R-Ariz.) plan to introduce an amendment reintroducing the rule and thus requiring big, diversified banks to split themselves up. Shelby, Sen. Johnny Isakson (R-Ga.) and Sen. John Cornyn (Texas) also supportthe measure.
An effectively similar, if functionally different, way of breaking up banks or limiting their size is by instituting the Volcker Rule— which bars banks from speculating with their own money by “prop trading” or investing in hedge funds. The current Dodd bill promises to institute something like the Volcker Rule, creating a commission to look at how to institute it down the road. But Sen. Jeff Merkley (D-Ore.) and Sen. Carl Levin (D-Mich.) have ready a measure introducing a more-stringent version immediately.
**Fix the ratings agencies. **The Dodd bill does little to fix the credit ratings agencies, whose profligate stamping of AAA ratings on collapsing subprime mortgage-backed securities helped to stoke the crisis. (The companies have a conflict of interest at the core of their business, in that they are paid by the companies whose securities they rate.) The Dodd bill creates a new office at the Securities and Exchange Commission to look closely at credit ratings agencies — but does little more to further reform them. Numerous Democratic senators have cited the issue as a major weakness in the bill, and Senate staffers say it is unlikely to go unchanged. Sanders has said he will introduce new language to strengthen oversight over and regulation of the agencies.
**Guarantee no taxpayer money will go to bank bailouts. **Republicans have derided the Dodd bill’s resolution authority fund — wherein the government will tax $50 billion from the banks, creating a pool of cash to be used by the Federal Reserve to shut down failing firms — as creating “permanent bailouts.” GOP politicians including Sen. Mitch McConnell (R-Ky.) have cited it as a major point of contention. But Senate staffers say that rather than killing the resolution-authority fund, Republicans want language explicitly guaranteeing taxpayers will not be on the hook for future bailouts.
**Keep the Fed the regulator of little banks. **Under the Dodd bill, the Federal Reserve would have oversight only of banks with more than $50 billion in assets. But Sen. Kay Bailey Hutchison (R-Texas) and Sen. Richard Shelby (R-Ala.) oppose this measure and want the Fed to have oversight of small banks as well — ensuring that the Fed does not become overly concerned with the business of big banks and ensuring that it keeps an eye on the small financial companies that can be the bellwether of bad economic times. Hutchison has saidshe plans to “certainly have an amendment that assures that state banks and community banks will be able to have access to be members of the Federal Reserve.”
**Make the Consumer Financial Protection Agency truly independent. **Sen. Jack Reed (D-R.I.) has promised to introduce amendment moving the Consumer Financial Protection Agency outside of the Fed.
**Improve hedge fund reporting. **Reed also plans to introduce an amendment closing a loophole in the Dodd bill that might let some private equity firms, venture capital firms, and hedge funds avoid registering with the Securities and Exchange Commission.
Suleman Shah

Suleman Shah

Suleman Shah is a researcher and freelance writer. As a researcher, he has worked with MNS University of Agriculture, Multan (Pakistan) and Texas A & M University (USA). He regularly writes science articles and blogs for science news website and open access publishers OA Publishing London and Scientific Times. He loves to keep himself updated on scientific developments and convert these developments into everyday language to update the readers about the developments in the scientific era. His primary research focus is Plant sciences, and he contributed to this field by publishing his research in scientific journals and presenting his work at many Conferences. Shah graduated from the University of Agriculture Faisalabad (Pakistan) and started his professional carrier with Jaffer Agro Services and later with the Agriculture Department of the Government of Pakistan. His research interest compelled and attracted him to proceed with his carrier in Plant sciences research. So, he started his Ph.D. in Soil Science at MNS University of Agriculture Multan (Pakistan). Later, he started working as a visiting scholar with Texas A&M University (USA). Shah’s experience with big Open Excess publishers like Springers, Frontiers, MDPI, etc., testified to his belief in Open Access as a barrier-removing mechanism between researchers and the readers of their research. Shah believes that Open Access is revolutionizing the publication process and benefitting research in all fields.
Han Ju

Han Ju

Hello! I'm Han Ju, the heart behind World Wide Journals. My life is a unique tapestry woven from the threads of news, spirituality, and science, enriched by melodies from my guitar. Raised amidst tales of the ancient and the arcane, I developed a keen eye for the stories that truly matter. Through my work, I seek to bridge the seen with the unseen, marrying the rigor of science with the depth of spirituality. Each article at World Wide Journals is a piece of this ongoing quest, blending analysis with personal reflection. Whether exploring quantum frontiers or strumming chords under the stars, my aim is to inspire and provoke thought, inviting you into a world where every discovery is a note in the grand symphony of existence. Welcome aboard this journey of insight and exploration, where curiosity leads and music guides.
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