The Obama administration and Senate Democrats yesterday urged senators to come to an agreement on broad financial regulatory reform this week, while the most moderate Republican on the issue argued that negotiations should go on for at least another three or four weeks before a bill is considered on the Senate floor.
Speaking after a meeting with Treasury Secretary Timothy Geithner, Sen. Susan Collins, R-Maine, said she is confident that a bipartisan agreement can be reached. But she warned that if the massive regulatory reform package that cleared the Senate Banking Committee last month comes before the full Senate this week unchanged, with a $50 billion resolution fund for unwinding failing companies, it will be met with a “buzzsaw of opposition” from the GOP.
Democrats and Republicans have rhetorically jousted over whether such a fund would lead to continued taxpayer-supported bailouts. While Democrats believe Republicans have disingenuously tried to argue that it would, they claim the Republicans came up with the idea in the first place. But Senate Banking Committee chairman Christopher Dodd, D-Conn., said yesterday there are other ways to unwind financially troubled firms.
Obama officials, for their part, did not propose the fund and have indicated it is optional.
In place of the fund, Collins is proposing that capital requirements be raised for financial firms as they get larger, to discourage them from becoming too big too fail. That idea appears to mirror one favored by the Regional Bond Dealers Association.
Separately, Dodd said in a morning press conference that the Securities and Exchange Commission’s enforcement action against Goldman, Sachs & Co. on Friday for allegedly defrauding customers who bought investments tied to risky subprime mortgages should give momentum to financial regulatory reform.
“I don’t really believe Republican members want to be in the position where they’re talking about filibustering a bill that would allow us to address those issues,” Dodd said, stressing that he remains open to reaching a bipartisan agreement.
Meanwhile, market participants warned that muni-related provisions in legislation proposed on Friday by Senate Agriculture Committee chairman Blanche Lincoln, D-Ark., to regulate over-the-counter derivatives market would be unworkable. Lincoln’s bill is scheduled to be marked up beginning tomorrow and could be added, in part, to the bill pending in the Senate.
Specifically, the market participants were referring to a provision that would impose a “fiduciary duty” on dealers requiring them to hold municipalities’ and pension funds’ interests above their own when they pitch, advise, or serve as counterparty on swap agreements with them.
While imposing a fiduciary duty on intermediaries such as financial advisers may make sense — as regulatory reform legislation approved by the House in December would do — imposing a fiduciary duty on swap counterparties does not, because the counterparty’s interests often are adversarial to the municipality’s, market participants said.
Michael Decker, managing director and co-head of the Securities Industry and Financial Markets Association’s municipal securities division here, said it is “simply legally unworkable” for swap dealers to have a fiduciary obligation towards their state and local counterparties. He said a better solution would be to mandate that states and localities employ registered and regulated swap advisers who do have fiduciary obligations to their clients.
While the regulatory reform bill approved by the House would impose such a duty, the muni section of the reform bill passed by the Senate Banking Committee in March would not. A spokeswoman for Lincoln did not respond yesterday to requests for comment.