Fed's future role at issue on Hill
Congress struggles with complex plan for reordering financial regulation. A key hangup is how much new power to give the Federal Reserve.
WASHINGTON (CNNMoney.com) -- A major Obama administration plan to deal with financial companies too big to fail is becoming too big to zoom through Congress.
Top White House and Treasury Department officials have been working behind the scenes for weeks to push lawmakers to start tackling legislation aimed at rescuing giant financial companies on the brink of failure -- like American International Group (AIG, Fortune 500).
But the legislative effort has gotten bogged down and made little progress over the past month, because it's tied to bigger, controversial questions. One of the big ones: Whether the Federal Reserve's regulatory role should be expanded.
The delay is significant, because reforming financial regulation is key to preventing future financial market crises. In addition, President Obama has promised global partners in the Group of 20 that the United States is dedicated to strengthening regulation of big companies.
One of the problems is that Congress is tackling two difficult things at once: Reform financial rules going forward and create a new system for cleaning up big companies like AIG that fall through the regulatory cracks. That makes the issue monster big, meaning Congress would be lucky to get it done before the end of the year, experts say.
"I have great concerns about moving the entire regulatory process in the middle of a crisis," said Sen. Bob Corker, R-Tenn. "Figuring out a resolution authority ... that's probably more urgent. But if it's all going to be done at the same time, let's not deal with that today. Let's deal with it in a prudent and thoughtful way."
And the role of the Fed, which many on Capitol Hill blame for missing warning signs of the current crisis, remains the central unresolved issue.
"There's a little bit of suspicion of the Federal Reserve and granting so much power to any one agency," said Wayne Abernathy, a lobbyist for the American Bankers Association who worked at Treasury under Secretary John Snow.
Congress and the Federal Reserve have a complicated relationship. The central bank is designed to be independent and non-political, although it regularly reports to Congress.
When the financial crisis struck, many on Wall Street and in Congress accused the Fed of contributing to the collapse by not cracking down on the kind of excessive leveraging that had grown common among banks.
Sen. Chris Dodd, D-Conn., who runs the powerful Senate Banking committee, has expressed concerns about entrusting more power to the Fed. Senate Republicans, particularly Sen. Richard Shelby, R-Ala, have been pounding their chests about the Federal Reserve for months.
"Sen. Shelby has serious concerns with granting the Fed that authority given its recent regulatory failures," said Jonathan Graffeo, spokesman for the top GOP senator on the banking committee.
Relations between the Fed and some lawmakers grew particularly tense after the Fed refused lawmakers' requests to reveal which major financial firms received billions in bailout dollars through the rescue of AIG. The Fed later released the information.
Later, when public outrage boiled over about bonuses paid to the same unit of AIG responsible for the company's demise, some lawmakers were irked to discover that the Fed had known for months about the bonuses.
During a hearing in March, the House Financial Services Committee called Fed Chairman Ben Bernanke, along with Treasury Secretary Tim Geithner, to testify about the AIG bonuses. During one tense exchange, Bernanke called a question from Rep. Donald Manzullo, R-Ill., "poorly posed."
The Senate signaled its distrust earlier this month when it voted 59-39 to pass a nonbinding amendment calling on the central bank to reveal the names of all financial institutions that get emergency loans. The Fed has strongly opposed such disclosure.
"The role of the Fed has changed dramatically," said Senate Finance Committee Chairman Max Baucus, D-Mont., during a March 31 hearing. "So the usual defense that we shouldn't intrude in the integrity and independence of the Fed, I think no longer applies."
Behind the scenes, Bernanke, a former chairman of the Princeton economics department, has made efforts to address tensions by being more accessible to Congress than past chairmen.
In recent weeks, Bernanke has made two quiet trips to Capitol Hill to talk face-to-face with small groups of Democrats. One meeting last Wednesday afternoon lasted more than an hour. Bernanke's spokeswoman said he also regularly talks with Republican lawmakers.
"We've not had a Fed chairman as accessible as he," said Rep. Al Green, D-Texas.
Green was one of a dozen lawmakers -- including Rep. Barney Frank, D-Mass., Rep. Carolyn Maloney, D-N.Y., and Rep. Mel Watt, D-N.C. -- who discussed with Bernanke the idea of making Fed programs more available to minority-owned businesses.
"I find it quite refreshing that he answers questions instead of giving us doublespeak in language that's difficult to process," Green said.
The political challenges have left the near-term future of the administration's efforts to reform regulation unclear.
Earlier this year, Frank and others had spoken publicly about empowering the Fed with supervision of systemically significant institutions such as hedge funds, large insurers and nonbanking firms.
Now, alternative options are also being discussed on Capitol Hill, according to congressional aides and lobbyists. Those include creating a super-panel consisting of different agencies, along with the Fed, or granting the Fed more power for a short period of time, such as two years.
For their part, the Treasury and the Fed have floated draft legislation to unwind big companies but neither entity has suggested publicly who should be the overarching regulator. They both recommended the Fed should have a fairly big role in deciding when a big financial firm has become too risky and needs government intervention.
Frank's committee is planning to hold a public hearing about creating a tougher regulatory system next month, according to a committee aide. The Senate has no similar plans yet.
When asked on Friday about Congress' slow pace on regulatory reform, Geithner said that he wasn't worried and believes "there is broad support" for action.