Financial Regulatory Forum

ANALYSIS-Activists hit compromises on U.S. financial reform

By Reuters Staff
October 20, 2009

U.S. Representative Barney Frank (D-MA), chairman of the House Financial Services Committee, holds a field hearing in Boston, Massachusetts March 23, 2009. (File photo) REUTERS/Brian Snyder By Kevin Drawbaugh
WASHINGTON, Oct 20 (Reuters) – The watering down of U.S. financial regulation reform in Congress drew questions on Tuesday from consumer advocates wondering what will be left of the Obama administration’s plan once lawmakers are done.

Compromises being struck at the committee level in the House of Representatives have already reduced the scope of the Obama plan, with another scaling-back move made on Tuesday regarding proposed rules for credit ratings agencies.

Proposals for regulating over-the-counter derivatives and creating a financial consumer watchdog agency are being trimmed amid intense lobbying by banks and financial firms to temper regulatory changes and protect their profits.

“Banks are once again setting aside tens of billions for year-end bonuses and their allies in Congress are once again opening up gaping loopholes in the regulatory reform legislation,” said Barbara Roper, chief investor advocate at the Consumer Federation of America, an advocacy group.

“The next few weeks and months will tell whether Congress can deliver on its promise of comprehensive reform, but the early signs are far from promising,” Roper said.

The struggle on Capitol Hill has a long way to go, with lawmakers quietly retreating from a year-end deadline for final action that had been targeted by the administration. Debate now looks likely to extend at least into early 2010.

The United States is under international pressure to align its financial reform efforts with a similar drive under way in the European Union as governments worldwide pursue changes meant to prevent another financial crisis like last year’s.
RATINGS AGENCY BILL
In that crisis, which is still shaking economies globally, credit ratings agencies were widely blamed for failing to spot problems in the debt markets when the housing bubble burst.

The Obama administration has proposed overhauling U.S. laws to repeal provisions that call for the use of credit ratings, a move that threatens top agencies such as Moody’s Corp, Standard & Poor’s and Fitch Ratings.

Documents obtained by Reuters on Tuesday showed that the repeal provision has been dropped from a draft bill set to be considered by the House Financial Services Committee.

The panel is expected to take up the credit ratings agency bill this week, possibly on Wednesday or Thursday. When it does, a House aide said, committee Chairman Barney Frank will offer an amendment proposing a “refined” repeal provision.

The draft bill also scraps a provision that would have barred agencies from rating a debt issuer for a year if one of their employees started working at the issuer.

The committee was also expected to vote soon, possibly on Wednesday, on an administration proposal to create a U.S. Consumer Financial Protection Agency, or CFPA.

The agency would centralize the government’s currently
scattered consumer protection duties. Banks and other financial firms are fighting to block or moderate the CFPA proposal.

CFPA PARED BACK
To ensure enough votes for passage, especially among moderate Democrats, Frank’s committee has steadily taken steps to reduce the CFPA’s scale.

For instance, a long list of businesses are exempted from agency oversight, under the current committee draft.

“The CFPA will not be able to protect consumers from a wide range of abusive lending practices if whole industries are freed from oversight,” said Carmen Balber, Washington director for the activist group Consumer Watchdog.

Obama’s OTC derivatives bill was also pared back before Frank’s committee approved it on Thursday.

The administration wanted all standardized OTC derivatives to trade on exchanges or equivalent platforms. The committee bill mandated this when deals involve financial speculation.

“The banking lobby has been working the back rooms to weaken the reforms proposed by the administration,” said Robert Borosage, co-director of the Campaign for America’s Future, a progressive political pressure group.

“Voters will hold accountable legislators who undermine the reforms we need,” Borosage said.

((Additional reporting by Rachelle Younglai, Editing by Gary Crosse))

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