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The Good the Bad and the Ugly in the Dodd Bill

Here are some highlights regarding the 1,300 page bank reform bill released by U.S. Senator Chris Dodd (D-CN) yesterday.

The Good

1) Capital requirements and leveraging requirements to be set by regulators (although some reformers would like these set in law to makes sure they do the job).
2) Creates a council of systemic risk regulators called a Financial Stability Oversight Council, which is generally a good idea. We don’t want to just leave it to the Federal Reserve.
3) Obama’s “Volcker Rule” included, not perfect, but at least it made the cut.
4) Consumer Financial Protection Agency remains a strong institution with rulemaking and enforcement authority over banks and nonbanks.
5) No new preemption of state attorneys general.
6) Credit rating agencies, which gave AAA ratings for toxic mortgage-related securities, can be sued for damages if they don't do their job.
7) Good reforms of the Federal Reserve system, including: NY Fed President will be appointed; no bank selection of directors; no bank personnel as directors; and a annual Fed audit.

The Bad

1) No break up of the too big to fail banks, no prevention of too big to fail, just a costly process for unwinding the firms once they do fail and a $50 billion industry fund to pay for such a collapse.
2) No caps on how large a bank can grow. The size limitation that was included as part of the Volcker rule just says that companies cannot merge to become greater than 10 percent of all liabilities in the system. This enshrines the too big to fail institutions that do exist and does not place a limit on the size that they can achieve organically.
4) Continuing derivatives loopholes for foreign exchange traded derivatives and there appears to be a problem with the lack of regulation for non-clearing house participants.
5) No real reform of credit rating agencies, such as by creating public or private competition for these failed institutions.
6) The Consumer Financial Protection agency will be housed at the Federal Reserve a move to appease Republicans that will undermine its legitimacy with the public. CFPA will not have authority over all banks, just the largest banks, a bad idea sure to encourage risky behavior on the part of smaller banks. CFPA authority over "large" payday lenders (exempting how many?). Systemic risk regulators of the Financial Stability Oversight Council can override CFPA rules with a 2/3 majority vote and just one regulator could delay CFPA rules. These are bizarre provision, isn’t it time to give consumer representatives a veto over banking regulators and not visa versa?

The Ugly

Usually a draft like this sets the high water mark. With 1,500 bank lobbyists on the hill and $390 billion spent on finance industry lobbying in 2009, the public will need to weigh in to fix the problems that do exist in the bill and hold off provisions that will make the bill worse. Get involved! Send an email to your legislators at www.BanskterUSA.org.

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