Why Dodd's Financial Reform Bill is Bad for Consumers

(MoneyWatch)  Sen. Chris Dodd insisted in a press conference today that his new, improved financial-reform bill would establish a strong Consumer Financial Protection Agency. And then something interesting happened -- he told the truth.

Asked why he favors housing the CFPA within the Federal Reserve, rather than establishing an independent agency, Dodd said in an aside, "Well, again, I think you know the answer -- there's a problem in terms of votes on that."

He's right in one sense. No Republicans in Congress back the idea of a stand-alone consumer protection agency. In the Senate, that leaves Democrats one vote short of a filibuster-proof majority, and support for a vigorous CFPA among Democrats also could wane in the months ahead.

But what Dodd really means is that lawmakers have more to gain by advocating the interests of banks than those of consumers. That, finally, is the critical question at the heart of negotiations over the CFPA: Will new rules shielding people from dangerous financial products hurt bank earnings? Banks fear they will, which is why the financial lobby is eager to yoke the CFPA to one of the existing banking regulators. These have historically focused more on companies' financial performance than issues like predatory lending.

Under Dodd's bill, the President would appoint the head of the CFPA. Significantly, however, the Senate would have to confirm that choice. The Connecticut Democrat sought to argue that this would heighten the agency's independence because lawmakers are more likely than regulators to have the interests of consumers (ie, voters) at heart.

No way. Given the financial industry's clout on Capitol Hill, allowing senators to nix the nominee for CFPA chief is tantamount to giving big banks say over who should lead the agency. It means that strong advocates for consumer protections, such as Congressional Oversight Panel chief Elizabeth Warren, would stand little chance of getting the job. Instead, lawmakers would likely seek candidates who are more politically palatable to their most generous constituents. And you know who they are.

In another provision that would hobble consumer protection, the bill also requires the CFPA to coordinate with the banking agencies. As a result, bank regulators could ask the proposed "systemic risk council" -- the roundtable composed of the major financial regulatory bodies -- to veto CFPA rules. And they would.

Dodd was less sincere when he said that Congress is "not good at writing regulations." His legislation, he said, sets out guidelines "without specifying exactly what the rules, the regulations, ought to say." That's Washington boilerplate, and it's not true. Because one way for lawmakers to get exactly the rules they want is to let other people write them.