Senators Christopher Dodd (D., Conn.) and Bob Corker (R. Tenn.) are close to a deal to create a new consumer-protection agency within the U.S. Federal Reserve, which is now chaired by controversial reappointeed Ben S. Bernanke.
This has been a contentious point due to heavy criticism of the Fed's past handling of its consumer-protection powers. . . .
Agreements on these details are expected to shape a bill that Sen. Dodd, chairman of the Banking Committee, plans to introduce in the Senate. The House of Representatives passed a bill overhauling financial-market rules in December. Differences between the two packages would have to be reconciled before any final agreement could be signed into law by President Barack Obama. . . .
Mr. Dodd . . .has been one of the Fed's biggest critics and routinely blasted the central bank for failing to enforce the consumer-protection powers it already has. . . . Mr. Dodd could introduce his bill later this week and potentially hold a vote in his committee later in the month. If other lawmakers balk at agreements between Messrs. Dodd and Corker, it could make it tougher for them to pass legislation this year. . . .
[A] new division within the Fed. . . would be led by a White House appointee, have the ability to write and enforce rules, and have a separate budget. It would also give the Fed a more direct mandate to focus on consumer-protection issues.
This could dramatically reshape the focus of the Federal Reserve. For years, it has primarily been focused on monetary policy over bank supervision and often made consumer protection an afterthought.
The bill would also create but regulate the power of the Fed to take over non-bank financial firms in a manner similar to the way that the FDIC takes over failed banks now:
White House and Treasury officials . . . have complained that the government was handcuffed during the 2008 bankruptcy of Lehman Brothers and the near-collapse of American International Group Inc. Existing law lets the Federal Deposit Insurance Corp. take over failing banks, but its powers don't extend to other types of financial companies.
Sen. Mark Warner (D., Va.) and Sen. Corker agreed to details of that arrangement on Feb. 23 after months of meetings, but details of the deal hadn't been announced.
The new arrangement, if adopted into law, would create a type of bankruptcy process for failing financial companies that aren't banks, such as bank-holding companies or bank subsidiaries that don't have insured deposits. Regulators would have the option to force any financial company into an FDIC-controlled dissolution if they believed market chaos required such an extreme step.
Under the proposal, this step could take place only after the agreement of the Federal Reserve's board, a council of regulators, and the Treasury secretary, in consultation with the president.
Messrs. Warner and Corker have said they wanted to create a process that was so painful for investors and management that no one would intentionally steer their company toward such a break-up and the government wouldn't be seen as a fail-safe for reckless behavior.
The new deal would wipe out shareholders and give the FDIC the power to remove management. Creditors would be guaranteed only the liquidation value of their claims in bankruptcy, though they could receive more under some circumstances.
Lawmakers debated for months how to pay for such a system. Treasury officials argued the government should be able to provide a bridge loan to unwind the company. Critics of that arrangement said it equated to a taxpayer-funded bailout.
While the consumer protection choice is bureaucratically and politically odd, the Fed does have consumer protection responsibilities (most notably it regulates the check payment system, handles one piece of the regulations prohibiting lenders from taking non-purchase money liens in certain household property, and is the regulator for a small class of firms that don't fit well into other regulatory slots, like AIG prior to its collapse).
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