As the Obama administration works toward a mid-June unveiling of a sweeping package of regulatory reforms for the financial sector, Congressional Republicans are preparing their own offensive in the coming week.
House Minority Leader John Boehner (Ohio) and Rep. Spencer Bachus (Ala.), the ranking GOP member of the powerful House Financial Services Committee, have planned major strategy sessions next week ahead of the House panel’s first public hearings on the subject
GOP lawmakers have been quietly working on a regulatory reform package “for months,” according to one knowledgeable House source, who shared extensive details of the “working proposal.”
“The GOP alternative will draw heavily from this,” the source said.
The meetings may even involve the participation of corporate leaders and trade groups, according to another source.
The GOP action comes as a White House team — said to be led by National Economic Council Director Lawrence Summers — is busy at work finalizing a white paper containing its proposals.
Those recommendations will be released the week of June 15, ahead of Treasury Secretary Timothy Geithner’s testimony before the HFS panel on June 18, according to the industry source, who is familiar with the timetable.
The high-profile legislation being forged on both sides of the political aisle is intended to address some of the systemic problems and regulatory failures that helped cause the nation’s worst financial crisis in almost a century.
The complicated and somewhat controversial package of reforms will cover a wide range of issues from consumer protection, executive compensation, hedge fund and derivatives trading supervision to a new regulatory framework.
The last category is expected to include the creation of a systemic, or super, regulator, as well as a so-called resolution authority, which would empower the federal government to unwind the operations of too-big-to-fail institutions.
Though much is known about the Democrats' proposals, the GOP version has been a well-kept secret. CNBC.com, however, has been given an extensive briefing on the working proposal and it is both thorough and decidedly different.
Among other things, it would ban additional government bailouts and create a new bankruptcy court category for big institutions that pose a systemic risk — a clear alternative to the resolution authority concept.
Other key components would limit the Federal Reserve’s regulatory and lending authority; initiate the privatization of mortgage giants Fannie Mae and Freddie Mac, which have been under direct government control since their near collapse a year ago; and restructure the existing regulatory framework for depositary institutions, including the FDIC, such that supervision of bank holding company subsidiaries would be spread among various agencies rather than consolidated in one banking regulatory.
In particular, the proposal appears to strike at the Fed’s expanded role in the current financial crisis, which has raised alarms on both sides of the political aisle.
The plan would force the Fed’s special lending facilities to be transferred to the Treasury’s balance sheet after a certain period and curtail its ability to lend under the emergency powers in section 13.3 of its charter. The central bank would also be subject to new oversight, in the form of audits by the General Accountability Office.
The working proposals are the work of a "very small group" of GOP House members, which includes Jeb Hensarling of Texas, according to another Congressional source; but Bachus will decide when they will be made public.
In contrast, Democratic proposals do not appear to address this issues with the Fed and generally envision an increase in its powers. For example, the Fed is widely expected to be named the systemic regulator, which would essentially looks over the shoulder of other agencies.
Horse Trading Time
The latest Treasury Department proposals — floated to Congress last week — included the creation of a new, single regulator model for all depository institutions, a merger of the SEC and CFTC and the designation of the FDIC as the agency with resolution authority.
Resolution authority would have presumably been used to handle the collapse of Lehman Brothers, Bear Stearns, AIG as well as Fannie Mae and Freddie Mac. It would apply to other investment-banks turned bank holding companies, such as Goldman Sachs , as well as traditional banking companies such as Citigroup and Bank of America .
Those proposals, however, have run into some opposition in Congress. Enough Republicans and Democrats, for instance, would rather see a council approach to resolution authority. What’s more, merging the SEC and CFTC was flatly rejected by House Financial Services Chairman Barney Frank (D.-Mass).
Meanwhile, the latest thinking at the Obama administration, according to a Reuters report Wednesday, appears opposed to a single banking regulator. The Republican working proposal would keep intact the two-agency system, but would require them to assess broader systemic risks as well as regulate the relevant subsidiaries of holding companies.
The Treasury now appears to be backing off the SEC-CFTC merger idea, say sources in and out of government.
Geither said as much in a dinner meeting Wednesday with key House committee leaders Frank and Bachus as well as those of the Senate Banking panel, Chris Dodd (D-Conn) and Richard Shelby (R-Ala.), sources said.
Geither was not asked to testify by Congress but actually volunteered to do so on that particular date, according to a senior Congressional staffer.
Though recent leaks to the news media about the administration floating proposals to Congressional Democrats and the Geithner dinner meeting with panel leaders last night indicate some coordination, the source said "there are no actual negotiations going on."
Moreover, Democratic lawmakers are not developing their own plan.
"We will take the outline they (the White House group) give us and start to work with that," the source explained.
Mark up on legislation isn't expected until late this month, but the House Financial Services panel has this far scheduled publics hearings on the subjects of executive compensation (June 11) and consumer protection (June 17), while its capital markets subcommitttee will take up derivatives (June 9) and insurance regulation (June 16).
The Senate Banking Committee, which has already held a dozen hearings on reguatory reform this year, is expected to seek more expert testimony and public discussion in the weeks ahead, as are other Congressional committees with oversight in the many moving parts of the reform package.
Despite all this, enough players on the GOP side would rather postpone regulatory reform until next year, citing the hazards of a hasty, crisis-driven legislative approach, which many say was the case with the Sarbanes-Oxley legislation forged amid the corporate accounting scandal of a decade ago. However, both the President and Congressional Democratic leaders have made it clear they want to ink something by the end of 2009.
“The House GOP really does have a great desire to figure what happened in the crisis before we act, but Democrats have a desire to push this through, so we want to be prepared with our own ideas. We are not prepared to get pushed out and we don’t want to be seen as the party of ‘No’,” said the House source.