Talks Continue on Senate Financial Reform Bill

Negotiators for Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and Bob Corker (R-Tenn.) were back at work on a bipartisan financial regulatory-reform bill Sunday, following talks Saturday that yielded no "real progress," according to one source.

As CNBC.com first reported yesterday, negotiators came into the weekend with Corker and the committee's senior GOP member, Richard Shelby of Alabama, having rejected Dodd's latest proposal covering consumer protections for financial products, which has been the key stumbling block for weeks.


Dodd's draft proposal, a copy of which was obtained by CNBC.com, called for a watered-down version of the new regulatory entity defined in the House's reform bill, which was approved late last year.

The Dodd proposal envisioned a Bureau of Financial Protection within the Treasury Department with a director appointed by the president. The bureau would have limited autonomy as well as rulemaking and enforcement authority.

The proposal was meant to address fundamental GOP concerns over the creation of a powerful independent agency whose policies and actions could potentially clash with existing regulators, creating safety and soundness issues within the financial system.

The proposal was described by one source as something Republicans could never accept. Their preference is for some new measures, which would probably added to the portfolios of existing regulators.

The House's version of the bill calls for the creation of a very powerful, stand-alone entity called the Consumer Financial Protection Agency, an approach first advanced by the White House.

Dodd's original draft legislation in November also included the CFPA concept, but Republicans quickly rejected it along with other components, forcing the committee chairman back to the drawing board.

Dodd has been working closely with Republicans since then, first with Shelby and more recently Corker, after Shelby and Dodd reached an impasse in early February.

Talks have taken place on almost a daily basis recently with both sides stressing that some differences at this stage are solely in the language of the bill. Both the Dodd and Corker camps say they remain hopeful a compromise package will be reached. That now appears unlikely until Tuesday at the earliest.

Another problem area is the regulation of over-the-counter derivatives. Sources say it may not be included in the draft legislation underway and would instead be handled as an amendment later on in the legislative process.

Other Components

There has, however, been general agreement on other key measures in the package, which include the creation of a systemic regulator council and federal authority to wind down the operations of wobbly too-big-to-fail financial firms to avoid a shock to the system, as was the case with Lehman Brothers in September 2008.

One recent proposal calls for a more structured process for federal regulators to follow in taking over troubled, too-big-to fail firms, in the hope of reducing the cost to taxpayers.

The process was presented by Senate staffers to insurance industry representatives and regulators Friday, according to sources familiar with the meeting.

The government has spent more money propping up insurance giant AIG than any other financial firm.

Under the plan, the Federal Reserve would make the decision to intervene, but it would have to be approved by a vote of the new systemic regulator board, also being proposed.

The Treasury Secretary would then consult with the President and have final say on the matter.

It’s not known whether this is a GOP- or Democratic-driven proposal, but Corker has been a strong advocate of enhanced resolution or wind-down authority. The proposal could appeal to many in Congress, as many Democrats and Republicans alike are worried about a permanent bailout mentality.

The new systemic regulator concept will be built around a council format, with the Treasury Department serving as chair and the Federal Reserve as vice-chair.

The Volcker rule — a prohibition keeping federally supported banks out of speculative activities — will be handled by regulators, not legislated by Congress, sources indicated.

The bulk of the negotiations involve Sens. Dodd and Corker, with Shelby, the ranking GOP member of the banking committee, more a peripheral figure.

Shelby's staff has been working on an alternative version of a bill, which has been described as a serious substitute to the Dodd-Corker one and is also bipartisan in content, sources indicated.

Financial reform — always among President Obama's top legislative priorities — has assumed even greater importance since health care reform stalled.