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Details Emerge On Key Parts of Financial Reform Bill

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) has offered a slightly watered-down proposal for a consumer watchdog agency for financial products in an effort to win Republican support for a sweeping package of regulatory reform.

Christopher Dodd (CT - D)
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Christopher Dodd (CT - D)

CNBC.com obtained a copy of the draft legislation outlining the consumer watchdog, which is covered in a one-page, three-part proposal defining the new entity’s structure as well as its powers over rule writing, examinations and enforcement authority.

The Dodd proposal would create 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 latest proposal is meant to address 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 House's version of the bill calls for the creation of a more 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, forcing the committee chairman back to the drawing board.

Dodd has been working closely with Republicans since then, first with the ranking GOP member, Richard Shelby of Alabama, and more recently Bob Corker of Tennessee, after Shelby and Dodd reached an impasse in early February.

"There is no agreement on consumer protections," said Dodd spokeswoman Kirstin Brost.

Sources say both Corker and Shelby had already specifically rejected Dodd's CFB proposal. Corker's office would not comment on details of the proposal or whether the senator supported it, but said talks were continuing this weekend and remained hopeful they would yield a compromise agreement.

Shelby's office could not be reached for comment at this time.

There’s 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.

Dodd and Corker were very close to an agreement on the watchdog agency Friday, according to Congressional sources, but unequivocal agreement depended on the exact language of the provision, as is often the case at this stage.

Consumer Bureau Details

In addressing GOP concerns about safety and soundness, Dodd's proposal would have the bureau subject to “enhanced cooperation and an appeals process.” Before any proposed or final rule could be issued, the bureau would have to consult with the prudential regulator, whose job is to limit risk-taking at firms holding government-insured deposits.

The regulator could appeal to the new systemic regulator council, which could veto the rule or send it back to the bureau for revision.

The BFP would have direct exam and enforcement authority over banks and credit unions with assets of more than $10 billion — similar to that of current frontline regulators. It would still have to consult with the appropriate regulator before taking any enforcement action.

Such powers would not apply to financial institutions with assets of $10 billion or less, which would instead remain with the existing regulators, such as the FDIC. The bureau would have “some backup authority,” according to the draft legislation.

The House bill gives the CFPA more authority in this area through a complaint process.

Too-Big-To-Fail Protection Shapng Up

Details of another key component have also emerged, according to sources.

A proposal now on the table would create 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 consult with the President and have final approval.

It’s not known whether this is a GOP- or Democratic-driven proposal, but Corker has been a stronger advocate of enhanced resolution or wind-down authority.

Other Components

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.

Finally, negotiations on regulaton of over-the-counter derivatives have yet to yield to anything firm. The subject may not wind up in the draft legislation underway and would instead be handled as an amendment, according to sources.

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

Obama In The Wings

Earlier this week, Shelby was said to have joined the Dodd-Corker talks, but that appears to be more a figurative than literal description.

Shelby and his staff have been working on their own version of a bill, which has been described as a serious alternative to the Dodd-Corker one and is also bipartisan in content, sources indicated.

Washington analysts say time is running out, with the White House clearly anxious for progress on the bill.

The president has stepped up his own efforts to push the regulatory reform agenda, weaving it into many speeches, in what is seen as a way of both supporting and keeping pressure on Senate negotiators.

Treasury Secretary Timothy Geithner Thursday met with the leaders of top financial trade groups — including the US Chamber of Commerce, Financial Services Roundtable, Financial Services Forum, Securities Industry and Financial Markets Association and the Independent Community Bankers Association — in an effort to build broad support for a bill.

There are also logistical concerns. Any compromise draft bill will be part of a long process, starting with debate at the committee level. And even if the Senate approves a package of reforms, it is likely to require reconciliation with the House version, followed by more votes.