Sen. Chris Dodd, Banking Chairman, Unveils Proposed Wall Street Crackdown

March 15, 2010 -- A year and a half after the financial system's collapse in the fall of 2008 sent the country spiraling toward recession, the chairman of the Senate Banking Committee unveiled a new proposal today to crack down on Wall Street in an effort to ensure that taxpayers are never again forced to bail out the industry.

"We are still vulnerable to another crisis – and neither I nor anyone else can tell you with any degree of certainty that the American economy could survive another crisis of this magnitude," said Sen. Chris Dodd, D-Conn., as he released his reform proposal at a news conference this afternoon on Capitol Hill. "It is certainly time to act."

His proposal focused on four key areas of the financial industry. At the top of Dodd's to-do list was avoiding a repeat of the government's $700 billion Wall Street bailout in the fall of 2008. The bailout helped some of the nation's biggest banks and automakers avoid collapse, but left taxpayers on the hook.

Now Dodd wants to prevent banks from becoming "too big to fail." His proposal would give the government the power to break up large failing firms, similar to the way the Federal Deposit Insurance Corporation can currently wind down smaller banks. The government would use a fund – worth $50 billion collected from banks – to finance the breakup of collapsing firms. New capital requirements would seek to prevent a firm from ever coming close to collapse in the first place.

"Never again," Dodd said, "should the American taxpayer be asked to write a check because of an implicit guarantee that the federal government will bail out a company."

Dodd's proposal would also create a council to monitor the country's economy for systemic risks.

The nine-person council, chaired by the Treasury secretary, would be tasked with placing nonbank firms that pose a risk to the system – such as insurance giant AIG – under the supervision of the Federal Reserve. With a two-thirds vote, the council could break up large complex failing companies if they pose "a grave threat to the financial stability" of the country.

Dodd's plans were in flux right up until their unveiling Monday. The lawmaker's spokeswoman, Kirstin Brost, said on Twitter that committee staff stayed up until 7:30 a.m. Sunday morning working on the proposal, and then until 2:30 a.m. Monday morning.

The Connecticut senator also included in his proposal a plan to bring transparency to the murky derivatives market. The trading of over-the-counter derivatives, such as credit-default swaps -- essentially insurance contracts on debt -- played a pivotal role in the downfall of insurance giant AIG. The company then received a record $182 billion bailout from the government.

Under Dodd's proposal, over-the-counter derivatives would be regulated by the Securities & Exchange Commission and the Commodity Futures Trading Commission. More derivatives will also be cleared through centralized clearing houses and traded on open exchanges. The official language will come once Banking Committee members Jack Reed, D-R.I., and Judd Gregg, R-N.H., reach an agreement.