House Financial Services Committee Chairman Barney Frank (D-MA) set an ambitious timetable for debating and marking up legislation on the Obama Administration's financial regulatory reform proposals during its September 23 hearing with Secretary of the Treasury Timothy Geithner. Frank stated that legislative hearings and markups would begin next week, with each markup expected to take two days, with the goal of wrapping things up before December. "This is going to be a very time-consuming committee in October and November," Frank said.

Chairman Frank predicted that the Senate Banking Committee would also take action this year, and indicated more broadly that the legislation emerging from Congress would differ somewhat from the Administration's proposals, signaling compromise in some areas while taking a more assertive position in others.

Chairman Frank is circulating a memorandum with his proposals. There is an expectation that legislative language will emerge within a week. Among his proposals is a suggestion to drop from the Administration's Consumer Financial Protection Agency (CFPA) proposal the requirement that banks and other financial institutions offer so-called "plain vanilla" financial products. The Administration's plan would require financial services entities to offer standardized basic financial products to consumers alongside other, more complex products to provide a basis of comparison. The "plain vanilla" product requirement has been one of the most controversial features of the proposed CFPA.

Frank's proposals are also taking a more assertive approach than the Administration—at least rhetorically—regarding resolution authority to wind up or resolve failing financial institutions. Instead of "resolving" such institutions, Frank asserted, the regulators should have the authority to dissolve and kill them. "There will be death panels enacted by this Congress, but they will be for non-bank financial institutions that will not be considered too big to die," he said. In actuality, the Administration's proposal would also allow these institutions to "die" and not just be resuscitated. If an institution is not systemically important, the current bankruptcy laws would apply to it. If it is found to be systemically important, then the "death and dying" provisions of the new law would apply, which essentially means that they would be handled by the Federal Deposit Insurance Corporation (FDIC) in a manner similar to the way bank dissolution is handled today.

There is at least one critical area that appears to still be unresolved among Democrats. It is the question of federal preemption of state consumer protection laws. The Administration's CPFA proposal would allow "stronger" state laws to trump federal standards. This would create a patchwork quilt of legal rules and enforcement patterns. The Blue Dog Democrats have indicated significant concerns with this. According to Rep. Jim Himes (D-CT), the Blue Dogs are advocating that a financial firm be able to choose whether to have a national charter and, thus, be exempt from state laws. Working with Himes on this issue is Rep. Melissa Bean (D-IL), who is a principal sponsor of the Optional Federal Charter legislation that would establish this approach for property-casualty and life insurance. Himes is quoted in Politico saying that Frank "has been very open-minded and very understanding of [their] concerns."

On the Republican side, Ranking Member Spencer Bachus (R-AL) signaled a willingness to enact regulatory reform, noting that the 1934 regulatory system is ill-equipped to handle the 21st century economy but cautioned that the focus should be on smarter regulation rather than more regulation. He said that the Administration's proposals represent a big-government solution that would entail a massive bureaucracy at the expense of taxpayer dollars and consumer freedoms. Despite deep-seated reservations about the Administration's plan, Republicans would not oppose common sense reforms—such as an end to bailouts. Bachus highlighted a competing Republican proposal that would develop an enhanced bankruptcy process to resolve failing financial institutions which would enable creditors and counterparties to bear the costs of failure, instead of taxpayers.

Two issues framed the discussion: (1) how should Congress and the Administration strike the balance between effective consumer protection while encouraging prosperity; and (2) how should they manage the moral hazard implicit in designating and regulating financial entities whose size or interconnectedness could threaten the stability of the economy—the so-called "too big to fail" firms.

Secretary Geithner, facing bipartisan skepticism from the Committee, laid out the basis for the Administration's approach while urging prompt action. A Consumer Financial Protection Agency is needed, he said, because the current system failed to protect consumers. According to Geithner, the CFPA would create a single regulator empowered with both rulemaking and enforcement authority to develop and enforce consumer protection standards that apply to all financial companies. The goal of the agency would be to preserve consumer choice and marketplace competition by providing consumers greater access to information and establishing a level playing field for financial companies. Geithner explained that the Administration's plan to address systemic risk regulation and resolution authority would allow institutions to fail without broad damage to the economy or taxpayers. The proposal would provide the regulatory tools necessary to unwind such institutions while imposing higher capital standards and more rigorous leverage standards for those who pose the highest risks to the economy. The complete package of reforms outlined by the Administration is needed to adequately address the problem. While confident in the Administration's plan, Geithner said that the Administration remains open to working with Congress to develop effective regulatory reforms. "We don't have a monopoly of wisdom on these things," he said, "Our test is, 'What will work'?"

The road ahead will be challenging not only for the Administration, but also for Congress. Many of the regulatory reform proposals have drawn criticism from within the Administration from the very regulators who would be tasked with carrying out the plan. The FDIC, OTS and others, for example, have expressed reservations about the creation of the CFPA and the abolition of the thrift charter. Rep. Maxine Waters (D-CA) asked Geithner whether the Administration would be able to sort out these internal disagreements in order to present a clearer picture of what must be done. Similarly, Rep. Randy Neugebauer (R-TX), citing criticisms of the Administration's proposals by the Federal Reserve and other agencies, said, "I get concerned that either these people are incompetent or maybe you aren't right." Sec. Geithner noted rather bluntly that, while these agencies have a principled and reasonable basis to attempt to protect their customary authority and role, quite frankly, the crisis indicates that the old system did not work. As with any move for reform, entrenched interests emerge with issues they want to protect and maintain. But, as Geithner noted, the task at hand is to figure out what is best for the country.

To that end, we shall continue to monitor and report on developments, keeping you informed as matters develop this Fall.

As of this morning, the Committee's schedule is as follows:

Wednesday, September 30, 2009, 10:00 am, Consumer Financial Protection Agency

Wednesday, September 30, 2009, 2:00 pm, Credit Rating Agencies (Capital Markets Subcommittee Hearing)

Thursday, October 1, 2009, 9:00 am, Chairman Bernanke

Tuesday, October 6, 2009, 10:00 am, Capital Market Issues

Wednesday, October 7, 2009, 10:00 am, Derivatives

Thursday, October 8, 2009, 10:00 am, Systemic/Prudential Banking Reform Issues

Friday, October 9, 2009, 10:00 am, Systemic/Prudential Banking Reform Issues