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

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."

Video of Senator Chris Dodd unveiling financial regulation plan.Play
Senator Chris Dodd Unveils Financial Regulation Plan

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.

VIDEO: Matt Jaffe on Sen. Chris Dodds push for financial regulatory reform.Play

"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.

VIDEO: Sen. Chris Dodd, D-Conn., plans an overhaul of financial regulations without bipartisan support.Play

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.

Protecting the Consumer

But the most controversial element of Dodd's proposal does not deal with "too big to fail" or a systemic risk council or derivatives trading -- it deals with how best to protect consumers from the perils of Wall Street. Financial products, such as subprime mortgages and credit card abuses helped ignite the 2008 meltdown.

Last summer, President Obama proposed a stand-alone consumer financial protection agency. When the House of Representatives, led by Financial Services Committee boss Barney Frank, D-Mass., passed its Wall Street reform measure late last year, their bill followed the president's lead and created an independent watchdog.

But the financial industry has fought vigorously against a stand-alone agency. Republicans, too, have opposed the idea. Today, Dodd relented in the push to form a stand-alone watchdog. Instead, his proposal placed the agency within the Federal Reserve.

The consumer watchdog would have an independent head appointed by the president and confirmed by the Senate, an independent budget, independent rule-writing, and enforcement authority. The watchdog would be charged with overseeing banks with assets over $10 billion, all mortgage-related businesses and large nonbank financial firms, including large payday lenders.

The subprime mortgage crisis played a part in fueling the recent financial crisis, and Dodd said Washington let it happen.

"If there was a watchdog on duty, it didn't bark," he said today. "We need to strengthen not only its bark, but also its bite."

Keeping an Eye on the Fed

The decision to place the watchdog within the Fed not only signaled an about-face from Dodd on the idea of a standalone agency but also on the notion that the central bank's powers should be reduced, not increased.

Dodd has strongly criticized the Fed's role in the buildup to the financial crisis -- at a hearing last July he said that the Fed's record was "deeply troubling" -- and his original reform proposal released last November slashed the central bank's powers.

Now the Fed will house the consumer watchdog and keep its oversight powers for banks with over $50 billion in assets. Payday lenders -- which provide short-term loans to help people make it to their next paycheck -- would also be subjected to new rules written by the Fed under Dodd's plan.

Also included in Dodd's proposal was the so-called "Volcker Rule," Obama's plan -- championed by economic adviser Paul Volcker -- to curtail risky activities by the country's biggest commercial banks. The plan would ban big commercial banks -- whose deposits are insured by the FDIC -- from engaging in so-called "proprietary trading."

At a hearing before the banking panel last month, Volcker warned, "If banking institutions are protected by the taxpayer and they are free to speculate, I may not live long enough to see the crisis, but my soul is going to come back to haunt you."

But not included in Dodd's plan was Obama's proposal to impose a fee on about 50 of the country's biggest banks with assets of $50 billion or more in an effort to recoup around $90 billion in expected taxpayer losses from the Wall Street bailout.

Dodd today said the tax "will be considered, but not in this legislation."

Politics Behind the Bill

To get his proposal through the Senate, Dodd will need to win some Republican support. Dodd had spent the past few months negotiating with Sen. Bob Corker, R-Tenn., after talks with the banking committee's ranking Republican, Richard Shelby, R-Ala., collapsed. But Dodd decided to unveil his proposal Monday despite not having an agreement with GOP lawmakers. The Connecticut lawmaker, who is not running for re-election this fall, said he wanted to push forward his reform plan in order to get it passed by the banking panel before the Easter break.

Today, Dodd said he was still "optimistic" about getting bipartisan support for the bill.

Then there is the matter of reconciling the Senate bill – assuming it passes – with the one that passed the House last year. Frank has vigorously opposed putting the consumer watchdog in the Fed.

But today, Dodd, echoing the argument made by the White House, said the location of the agency is "not the important part."

"The fact that this institution would be housed in rented space in the Fed does not mean it has one iota of authority over the operation or the budget of this agency," Dodd said.

The financial industry today also spoke out about Dodd's proposal.

Steve Bartlett, president and CEO of the Financial Services Roundtable, said Dodd's bill "hits the right notes on some aspects, like too-big-to-fail and streamlining of bank regulation."

However, Bartlett said, "Consumer protection should not be separated out from the regulators which govern the products. We are concerned with the autonomous authority given to such an entity."

But a year-and-a-half after the financial meltdown, lawmakers, such as Dodd are well aware that, with elections looming this fall, the clock is ticking. The push for reform, Dodd said, must start in earnest right now.