GOP Financial Reform Package Due Out Thursday
The Republican Party's blueprint for reform would strip the Federal Reserve of significant powers, create a single banking regulator, establish a special bankruptcy code to handle the collapse of too-big-to-fail non-banking firms and, promises "no more bailouts."
CNBC.com has obtained a copy of the plan, which is expected to be unveiled at a news conference Thursday, according to a House source.
GOP leadership has essentially signed off on the plan, which is now in final form, having been presented to key House Republicans Tuesday, said the source. CNBC.com first reported details of the plan last week.
The Obama administration, meanwhile, continues to work on its regulatory reform proposals amid reports they are being watered-down. The administration is expected to send its package to House Democrats next week, when Treasury Secretary Timothy Geithner is scheduled to testify before the House Financial Services Committee.
The GOP plan, based on three "overarching principles" and eight "specific policy proposals", has been in development for months and is the work of a handful of influential House members.
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.
Key Policy Proposals
First and foremost, the Republican plan is "designed to ensure that (1) the government stops rewarding failure and picking winners and losers; (2) taxpayers are never again asked to pick up the tab for bad bets on Wall Street while some creditors and counterparts of failed firms are made whole."
"This is part and parcel of what the American public has been looking for — to get out of this bailout policy," sad Rep. Scott Garrett (R-NJ) in commenting on the plan.
In particular, the GOP proposal would resolve the affairs of large, complex non-bank financial firms, such as General Motors and Chrysler, through a new section of the bankruptcy code that "will make 'orderly failure' a practical solution for resolving troubled firms."
Bankruptcy judges would be empowered to stay claims by creditors and counterparties "to prevent runs on troubled institutions, thereby helping to alleviate the panic that could strike the financial system."
Democrats are thought to be in favor of granting new resolution authority to a single federal regulator or group of regulators, which would unwind the businesses of all so-called too-big-to-fail firms, much the way the FDIC now handles troubled commercial banks. THE GOP plan rejects the concept of too big to fail altogether.
Such 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 .
"The whole idea is not to create another bailout instituton," said Garrett, one of the plan's principal architects, a group that also includes Jeb Hensarling (Texas), Tom Price (Georgia) and Spencer Bachus (Alabama), the ranking Republican on the financial services panel, according to various Hill sources.
A related proposal would create a single regulator for depository institutions by combining the Office of the Comptroller of the Currency and the Office of Thrift Supervision, as well as shift existing supervisory functions of the Federal Reserve and the FDIC to that agency The new agency, for insance, would oversee bank holding companies, now in the Fed's portfolio.
"The reason we do it with the Fed is to keep them focused on their monetary policy responsibilities," explained Garrett. "There can be an inherent conflict between the monetary and regulatory-supervisory responsibilities"
The Fed And Other Losers
Indeed, the central bank is one of the big losers in the GOP plan. Not only would the Fed not get the systemic, or super, regulator, job that some in the Democratic camp are advocating, it would also be relieved of regulatory and supervisory responsibilities so it could focus on "on its monetary policy mandate."
"Reallocating these duties will eliminate the Fed’s current incentive to prop up the economy through an accommodative monetary policy to prevent firms under its regulatory purview from failing," states GOP proposal No. 4, "Fundamentals of Fed Reform."
The GOP plan would also increase Fed transparency and accoubtability by making it subject to more audits by the General Accounting Office; mandating clear inflation targets; and limiting its emergency lending authority under section 13.3, which Chairman Ben Bernanke has used to provide trillions of dollars in liquidity during the current crisis.
The plan would specifically eliminate the Fed's "ability to use its 13(3) authority to intervene on behalf of a specific institution" and generally transfer the special lending facilities to the Treasury’s balance sheet after a certain period.
Though a hallmark of the Fed's success has been its independence, criitics and supporters alike of both politcial parties have questioned the extraordinary use of its massive balance sheet to stimulate the economy.
"I think they intended them to address short-term, immediate problems," said Garrett, adding that the Fed's actions essentially challenge the spending authority granted to Congress under the Constitutuon.
Democratic proposals--at this point--are not thought to address these aspects of the Fed's operations
Fannie Mae and Freddie Mac, the two hobbled mortgage giants, would also be subject to sweeping reform. Taxpaper subsidies would be phased out and the companies either put into receivership or conservatorship, depending on their financial condition. Ultimately they would be "turned into non-government-backed entities that compete on a level playing field with other private firms," the plan states.
Other major proposals include creation of a "Market Stability and Capital Adequacy Board", which would fulfill the role of the systemic regulator. The board would be "chaired by the Secretary of the Treasury and comprised of outside experts as well as representatives from the financial regulatory agencies responsible for supervising large, complex firms." It would not, however, have independent supervisory or enforcement powers.
Another key departure from the Democratic model is reform of the credit rating agency system. The GOP measures would "discourage blind reliance on ratings supplied by the major credit rating agencies that has had such disastrous consequences for investors and the economy as a whole."
The GOP plan also includes greater protection for consumers through what it calls improved disclosure and complaint procedures as well as strengthened anti-fraud enforcement. Unlike the Democratic proposal, it does not call for the creation of a new agency.
"This is a really substantive plan," said the House source. This is not a last-ditched effort to create something that looks like an alternative."
Republican lawmakers acknowledge that their plan has virtually no chance of becoming law, but see an opportunity for some of the proposals to get wrapped into forthcoming legislation — the systemic regulator board, for one — as Democratic unity on the components of a reform package appears less likely/.
"They may find they may not have quite the support they had," said Garrett