The Obama administration is no longer insisting on the creation of a
stand-alone consumer protection agency as a central element of the plan
to remake regulation of the financial system.
In hopes of quick congressional approval of a reform bill, White
House officials are opening the door to compromise with lawmakers
concerned about creating a new bureaucracy, according to congressional
and some administration sources.
economic team is now open to housing the consumer regulator inside
another agency, such as the Treasury Department, though they still
prefer a stand-alone agency. In either case, they are insisting on a
regulator with political autonomy and real teeth so it can effectively
enforce rules designed to protect consumers of mortgages, credit cards
and other financial products.
The administration may also have to compromise on Obama's recent
proposal for a rule to limit risky activities at banks by prohibiting
them from engaging in many kinds of speculative investments.
Treasury officials are preparing to send Capitol Hill a toughly
worded measure that would bar banks from making certain investments
that benefit only the firms' bottom line rather than their customers.
But there is little support among either Democratic or Republican
lawmakers for this proposal, known as the "Volcker rule," and Senate
leaders are now closing ranks around legislation that would leave it to
banking regulators, rather than the law, to decide which activities to
From the start of the Obama presidency, administration officials
have made far-reaching financial reform one of their highest
priorities, along with overhauling the nation's health-care system.
Officials have vowed to put in place new rules and regulators to
prevent a repeat of the abuses that precipitated the financial crisis.
Even as the administration is showing new flexibility, some senior
executives in the financial industry have also been coming around,
easing some of their intensive lobbying against the regulatory
overhaul. Instead of trying to block the proposals for a consumer
protection agency and curbs on risky investment practices, these
executives are working more closely with Democrats to secure a deal the
banks can live with.
After the White House escalated its attacks on Wall Street earlier
this year, some executives concluded that the swift passage of a
regulatory reform bill would be in their best interest because it would
move them out of the political cross hairs, industry officials said.
The adoption of a new bill would also resolve much of the uncertainty
about the rules to govern the financial industry, allowing companies to
make business decisions with more confidence.
According to some industry officials, Wall Street executives also
sense that they now have a better chance for a relatively favorable
bill because the administration is in a hurry to record a major
legislative achievement before congressional elections in November. At
the same time, some financial lobbyists
said they were afraid the administration would unilaterally impose
strict new measures on the industry if Congress could not come up with
The new momentum has raised hopes within the administration that a
bill could be signed before the elections. But the path is still not
clear. Administration officials and Democratic leaders have been
seeking to win support from Republicans, who could filibuster
the bill, without alienating liberals insisting on a new consumer
protection agency and tough restraints on Wall Street activities.
Senate Banking Committee Chairman Christopher J. Dodd
(D-Conn.), who is shepherding the effort in the Senate, said Wednesday
evening that there is still no final agreement between Democrats and
Republicans, and aides said that many vital details remain unresolved.
"Dodd is willing to be flexible, but there's a limit to that
flexibility," said one Senate aide, who spoke on the condition of
anonymity because talks are ongoing. "Both sides are going to have to
learn to live with things that aren't exactly how they would have
Still, major components of the measure are beginning to take shape.
Michael S. Barr,
Treasury's assistant secretary for financial institutions, delivered a
speech Tuesday that repeated the need for a consumer financial
regulator with broad enforcement powers. Absent, however, was a call
for a stand-alone, agency -- an intentional omission, a source familiar
with the matter said.
A free-standing agency had been a central part of the original
blueprint released by the Obama administration, which said it is
essential to have one agency with the sole mission of protecting
consumers from lending abuses. In the lead-up to the financial crisis,
that responsibility was spread across numerous agencies and often took
a back seat to ensuring the well-being of banks. A version of the
stand-alone proposal was included in a bill passed by the House in
Dodd has expressed some support for the plan. But Republicans on his
committee have said that such an agency would clash with the separate
set of regulators overseeing the health of financial firms. Sen. Bob Corker (R-Tenn.), who has been working with Dodd on a revised Senate bill, has called the idea a "non-starter."
The two men have been exploring solutions that both sides could embrace. On Wednesday night, Treasury Secretary Timothy F. Geithner
huddled with Corker and Dodd to go over the work the two senators have
been doing on regulatory reform. Only Dodd would comment on their
meeting, saying, "There's no deal tonight," but adding that he remained
In one scenario under discussion, a consumer bureau would be set up
within the Treasury Department. In another, a consumer protection
division would be established inside a new national agency to regulate
The latter idea would upset some consumer advocates, who say they do
not want the consumer regulator to answer to bank supervisors.
Advocates say these supervisors have shoddy records on shielding
customers from abusive financial practices.
Dodd's legislation, which he is expecting to unveil next week, is
also likely to strip the Federal Reserve of much of its authority to
supervise banks, government sources said. Few on Capitol Hill want to
take up the unpopular cause of defending the central bank, which
lawmakers say not only ignored the warning signs of the financial
crisis but also has been aloof from the problems of ordinary Americans.
Dodd's bill is also set to include updated language giving the
government authority to wind down large, troubled financial firms in
extreme cases, congressional and industry officials said. The measure
will make bankruptcy the preferred route when firms run into trouble.
The government's resolution mechanism would serve as a backstop and
possibly could be overseen by the Federal Deposit Insurance Corp.