The holiday spirit has clearly descended on the Senate Banking Committee. Just before Christmas, the committee’s chairman, Christopher Dodd (D-CT), and its ranking member, Richard Shelby (R-AL), unveiled a plan for negotiating their differences over financial regulation. With an overhaul of oversight rules stuck and anger at bankers still simmering, the statement made for good politics by senators who want to show progress for voters. But the make-nice announcement obscured the gulf that still must be bridged before Congress can reach agreement.
The holiday spirit has clearly descended on the Senate Banking Committee. Just before Christmas, the committee’s chairman, Christopher Dodd (D-CT), and its ranking member, Richard Shelby (R-AL), unveiled a plan to settle their differences over financial regulation. With an overhaul of oversight rules stuck and anger at bankers still simmering, the statement made for good politics by senators who want to show progress for voters. But the make-nice announcement obscured the gulf that still must be bridged before Congress can reach agreement.
Dodd and Shelby have a long history of working together, points out Dean Baker, co-director at the Center for Economic and Policy Research. But on financial reform, they are completely at odds. Less than two months ago, Dodd unveiled a draft bill a draft bill that would establish a consumer protection agency and consolidate all banking regulation into a single entity. Shelby denounced it as a partisan plan with too much federal interference. Though Shelby is generally in favor of stiffer rules for bankers, he said the bill would create too many problems for banks. He also opposed the consumer protection agency plan. The bill is important to Dodd, who faces a tough reelection fight in November and is eager to counter charges that he has become too cozy with big banking.
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Last week’s bipartisan statement showed that both sides were eager to get past the stalemate, but their agreement dealt mainly with a mechanism for negotiating a bipartisan solution. So while Dodd and Shelby may be willing to play ball again, they have a long way to go before reaching an agreement. In order to get broad support for regulatory reform, Dodd will have to pull back on his ideas of creating a standalone consumer protection agency and a single systemic risk regulator. He’ll also have to agree to leave in place both state and federal banking charters, because Shelby seems unlikely to back down on consolidating banking regulators.
In the end, the two senators are likely to agree on legislation that punts on key issues, leaving many of the details up to regulators to resolve later. For example, they’ll probably create an agency to write consumer rules, while leaving enforcement up to existing regulators. The same goes for derivatives and credit rating agencies, which are headed for more Securities and Exchange Commission oversight.
So despite the feel good holiday accord on procedure, financial regulatory reform is far from a done deal. Jaret Seiberg at the Washington Research Group sees a bill emerging from the Senate Banking Committee by February at the earliest, with full Senate action in the spring. Expect legislation to reach President Obama no earlier than Memorial Day, and it will be a lot less than the massive overhaul that he and Dodd were hoping for. But with the financial crisis still fresh in voters’ minds, legislators will be willing to water down their original proposals to get enough support to declare victory.
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