Senate Banking Committee Chairman Christopher Dodd was in a surprisingly accommodating mood when he began debate on his freshly unveiled financial overhaul bill Nov. 19. Sen. Richard Shelby of Alabama, the panel's ranking Republican, had just lambasted the plan, which Shelby said doesn't prevent more bailouts of giant financial firms and is loaded with "provisions that have nothing at all to do with financial crisis but everything to do with politics."
Dodd, after Shelby's lengthy diatribe, merely quipped: "Well, I thank you for the endorsement of the bill."
Much of the day went like that, with GOP committee members tearing into the bill's major provisions, lamenting the lack of hearings on the legislation's text and complaining about their lack of influence on the drafting of a bill they expected to vote on in the coming days.
In short, the action in Dodd's committee appeared to be shaping up much the same as in the House, where the Financial Services Committee chaired by Rep. Barney Frank, D-Mass., next week is expected to pass a bill with no Republican support.
But at the end of the session, Dodd, D-Conn., took a step that would be hard to imagine in the atmosphere that plagues the House. He agreed almost immediately to set his plan aside and work with GOP members of his committee to come up with an alternative that can be assured of winning the 60 votes necessary for Senate approval.
Taking the Republicans' offer to negotiate in good faith at face value, Dodd urged colleagues on both sides of the partisan divide to "really roll up our sleeves and begin working on this."
Dodd's attempt to bring Senate Republicans on board could transform him into the most critical player in the financial revamp debate. It would be an ironic evolution: All summer Dodd had been criticized for ignoring financial regulation overhaul -- the primary item on his committee's to-do list -- in favor of healthcare change. Dodd also had come under fire for introducing a highly partisan financial bill that had been dismissed as little more than a ploy to remake himself as an economic populist in the face of a tough re-election fight.
Dodd's original plan, unveiled Nov. 10, called for merging the four major federal bank regulators into a single concern. That would mean the Federal Reserve Board would lose its bank supervision duties, although it would continue to conduct monetary policy and oversee the payments system. The bill, like its House counterpart, puts few restraints on federal regulators' authority to intervene in -- and fund -- failing or systemically risky financial firms.
Republicans vehemently oppose unbridled authority for regulators, and the lack of any requirement to liquidate firms that receive public money. Tennessee's Bob Corker said he was "livid" when he read Dodd's original plan. "If this bill became law as it is, we would not be talking about systemic risk; we would be talking worldwide pandemonium. I think it would be a cratering type of legislation," said Corker, who will be one of the lead GOP negotiators of the new bill. "I think the chairman realizes there is a lot of work to do."
When he presented his bill, Dodd had insisted that starting out with a compromise would be a "huge mistake" that would dampen chances for making bold changes to financial services regulation. "You're given very few moments in history to make this type of difference," he told reporters at a press conference to announce the initial bill. Dodd ditched that principle pretty fast.
Reaching a compromise will be no small feat. Shelby, like all Republicans, opposes the Democrats' plan to create a Consumer Financial Protection Agency. No common ground will be found on that issue, and the Democrats will likely pass it over GOP objections.
Shelby also opposes Dodd's plan to establish a single consolidated supervisor of federally insured depository institutions. Establishing a mammoth federal regulator, Shelby warned, will set the stage for the eventual death of the "dual banking system," a system unique to the U.S. in which the federal government and the states can charter banks.
Current supervision of state banks is shared by state and federal regulators, either the Federal Reserve Board or the Federal Deposit Insurance Corp. A consolidated federal regulator would be emboldened to bully state officials, he predicted. This "flawed construct" threatens the dual banking system, Shelby said.
Community banks, many of which are state-chartered, have wielded great influence in House deliberations over the reform, and it's likely they will in the Senate, too.
Small banks have managed to get themselves exempt from the CFPA examination in the House bill. Banking trade groups despise Dodd's massive streamlining of regulators, and with their clout he's likely to back off quickly.
The House bill calls for a more modest merging of regulators and retains the Fed's and the FDIC's split of state bank supervision duties. The White House favored avoiding any merger of regulators, so it's easy to imagine Dodd quickly relenting on this issue.
Another provision likely to fall by the wayside is Dodd's plan to replace the presidents of the 12 regional Federal Reserve Banks, now picked by bankers in their districts, with appointees chosen in Washington. The rationale for Dodd's proposed switch is to end the cozy relationship between the New York Fed and the big bank holding companies it ostensibly oversees.
Beyond New York, Fed presidents such as Gary Stern in Minneapolis, now retired, and Thomas Hoenig in Kansas City, Mo., have frequently criticized the Fed's handling of too-big-to-fail banks and its monetary policy. "The regional Fed presidents have been voices of restraint," said Sen. Jim Bunning, R-Ky.
Voices of restraint have been sorely lacking in the House Financial Services Committee, which is crafting a bill that gets more partisan by the week. Frank on Nov. 20 postponed a final vote on the overall bill so he could address concerns raised by the Congressional Black Caucus. The vote now is tentatively scheduled for Dec. 1. Frank said the caucus had concerns about whether the bill fairly answered minorities' needs.
The leader of this effort, Rep. Maxine Waters, D-Calif., has not specified what type of provision she wants, but a spokesman for Rep. Jeb Hensarling, R-Texas, said it would be difficult to imagine any step being taken that did not harden GOP resolve against Frank's bill.
The day before the Black Caucus' move, Democrats pushed through a controversial amendment that would allow a proposed council of financial regulators to break up financial institutions that might put the economy at risk, even if they are healthy.
"No firm should be considered to be too big to fail," said Rep. Paul Kanjorski, D-Pa., the measure's author. The proposal was approved largely along party lines, with three Democrats opposing.
Republicans on the committee opposed the provision, arguing it could hurt America's ability to compete globally and called it draconian and unconstitutional. "When the government says you are too big and we're going to make you dismantle, that is a taking of private property rights," said Rep. Randy Neugebauer, R-Texas.
The ever-strident tone of the House debate is pushing Frank's effort toward irrelevancy. In the meantime, members of the Senate Banking Committee finally appear to be taking their job seriously.
As Shelby observed when Dodd agreed to start over: "I think we can do it. This is the most important piece of legislation to come in front of this committee in 80 years."
Donna Block contributed to this report.