Business for Shared Prosperity

By Alison Vekshin and Lorraine Woellert
Bloomberg, Dec 10, 2009

The U.S. House will resume debate on legislation to toughen rules policing Wall Street today after lawmakers clashed over an industry-supported fund the government would use when unwinding failed systemically important firms.

Republicans, who oppose the measure, called the provision for a $150 billion account a perpetual government bailout while Democrats defended it as a way to prevent taxpayers from propping up ailing financial firms in the future.

“There is no bailout fund,” House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat who proposed the legislation, said yesterday as debate began. “If a company fails, it will be put to death.”

The legislation creating the fund and revamping rules for Wall Street is central in the effort by Congress to end government rescues of firms deemed “too big to fail” that led to last year’s bailouts of New York-based American International Group Inc. and Citigroup Inc. The banking industry, Republican lawmakers and the nation’s biggest business lobby are fighting to scale back the legislation.

The legislation is a “perpetual Wall Street bailout,” Representative Jeb Hensarling, a Texas Republican and member of the Financial Services Committee, said yesterday. “There will be fewer jobs. There will be more bailouts. There will be more government control.”

Frank’s legislation adopts priorities President Barack Obama set out in June for strengthening U.S. financial rules. The bill would let regulators unwind failed systemically important firms, sets up a council to monitor companies for systemic risk and gives regulators power to break up large firms. The measure would rein in the derivatives industry and create a Consumer Financial Protection Agency.

FDIC Fund

The Federal Deposit Insurance Corp. would collect fees from financial companies with more than $50 billion in assets to create the fund. The government would then pay costs to take apart a failed firm in an orderly fashion rather than letting it fail in bankruptcy and possibly shake the economy.

Disagreement over which of 238 legislative amendments would be considered by the House delayed the start of debate yesterday. A main point of contention was a proposal by Representative Melissa Bean, an Illinois Democrat, to bar state rules from overriding federal consumer-protection regulations for national banks, a measure backed by the financial-services industry. Consumer groups support letting states impose their own tougher rules on banks, an approach the industry said would require lenders to comply with a “patchwork” of state laws.

“Differences have been narrowed and I think you’re getting something that both sides can live with,” Frank told reporters yesterday, without offering details on the compromise.

New Democrats

The New Democrat Coalition, a pro-business bloc of 68 Democrats, supported the industry’s position on pre-emption and negotiated the agreement with Frank and the leadership.

“New Dems have reached an agreement that includes a balanced compromise on our key issues,” Representative Joseph Crowley of New York, the group’s chairman, and Bean, vice chairman, said in a statement. “This agreement will allow us to create an empowered Consumer Financial Protection Agency that will place tough new federal regulations on financial institutions from large banks to payday lenders to mortgage brokers.”

The U.S. Women’s Chamber of Commerce yesterday endorsed the consumer agency, saying it would free up lending and protect small companies that rely on private credit to manage day-to-day operations. Lending practices such as surprise interest-rate increases and credit limits hurt proprietors, the group said.

“Millions of women business owners who used their home equity to secure small business loans are now at risk of losing both their homes and their businesses,” said chamber Chief Executive Officer Margo Dorfman.

The U.S. Chamber of Commerce, the nation’s biggest business lobby, this week opposed the agency and recommended a council to coordinate financial regulation and enforcement of consumer- protection rules by existing regulators.

A final vote on the bill is possible tomorrow, according to a House Rules Committee spokesman.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net ; Lorraine Woellert in Washington at lwoellert@bloomberg.net.

Copyright 2009 Bloomberg