House panel begins push on financial overhaul

WASHINGTON — A key House panel moved to tighten rules on previously unregulated financial instruments Wednesday, a long-awaited step toward governing the obscure and complex transactions at the heart of the troubles that befell some of Wall Street’s most well-known financial houses.

The House Financial Services Committee this week was poised to adopt a proposal close to the Obama’s administration’s plan to move most private trading in over-the-counter derivatives to regulated exchanges. Committee Chairman Barney Frank dropped his proposal for an outright ban on trades that regulators judge detrimental to markets.

At the same time, another component of President Barack Obama’s regulatory plan — a new Consumer Finance Protection Agency — was facing more resistance. Moderate Democrats planned to recommend changes that would rein in the administration’s proposal.

Creating a new consumer agency has emerged as one of the most politically difficult aspects of the regulatory legislation. Consumer advocates on Wednesday called for the defeat of moderate amendments that they say would weaken consumer protections. Banking groups urged the committee to kill the agency proposal altogether.

“There is a legitimate philosophical difference here as to whether or not consumer protection is almost per se an interference with choice,” Frank said.

The proposed derivatives regulations were far less contentious, though Republicans offered an alternative that would require greater visibility and disclosure by companies that engage in those transaction but would not subject them to regulated exchanges.

While many companies use derivatives to protect themselves against market fluctuations, these products have also become a means for financial speculation. They grew into a $600 trillion global market that regulators say can threaten the entire economy. Derivatives such as credit default swaps brought down Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled insurance giant American International Group Inc.

Frank, D-Mass, proposed exemptions that would apply to companies that use derivatives for commercial reasons to protect against risk, not those that use it for financial reasons. Companies could lose that exemption if regulators see a pattern of activity that places other participants in the transactions at risk. Exempt or not, companies also would have to report their trades and the prices.

“There will be no more hidden trades where we don’t know the price,” Frank said.

Frank said he was persuaded not to give regulators the power to ban so-called abusive swaps. “There was a concern that a broad grant to ban absolutely abusive swaps was going to be unsettling,” he said.

Instead, regulators would be required to oversee transactions and look for potential problems.

Michael Barr, assistant treasury secretary for financial institutions, said the administration supported Frank’s changes. He said the legislation’s main goal was to require transactions such as those carried out by AIG to be reported and traded under the supervision of regulators.

Frank intends to complete work on the derivative regulations and the consumer agency this week. House Democratic Leader Steny Hoyer, D-Md., said Wednesday that he would expect the legislation to reach the House floor for a vote in three to four weeks. The Senate has yet to act on the Obama proposals.

Spencer Bachus, the top Republican on the committee, said exchanges, together with requirements for more capital to protect against the risks, could backfire and hurt investors that are unfamiliar with the complicated instruments.

“You’ll price out smaller companies,” Bachus, R-Ala., said. “And you put something on an exchange and you are going to attract a less sophisticated participant.”

The consumer agency faces stiffer opposition. Community banks and the Chamber of Commerce have wielded the most influence in getting the House panel’s Democrats to modify and clarify the regulatory powers that Obama would give it.

One sticking point is whether to give states additional powers to regulate the consumer practices of federally chartered banks. Obama and Frank favor doing it; Rep. Melissa Bean, a moderate Democrat from Illinois, is leading the opposition against it.

Frank dropped several of Obama’s proposals, including making banks offer standardized “plain vanilla” mortgages. His draft bill also omits Obama’s proposal to make lenders take added measures to ensure that their communications with customers are not deceptive.

Two moderate Democrats, Brad Miller of North Carolina and Dennis Moore of Kansas, will offer an amendment to spare small banks and credit unions from additional examinations by the consumer agency.

But the Treasury Department’s Barr told reporters: “There’s got to be the core principal that the Consumer Financial Protection Agency can examine and enforce and write rules for banks and non-banks alike regardless of size.”