Democrats toughen anti-bank proposals

Following today's scheduled Senate banking committee report on proposals to keep the financial system from blowing up again, lame-duck Sen. Chris Dodd (D-Conn.)'s bill is expected in Congress tomorrow. "Stricter than expected," says Paul J. Miller Jr. of FBR Capital Markets today in a report to clients." He says the bill will likely contain:

1) An independent Consumer Finance Protection Agency "with an independent head and autonomous budget, with strong rulemaking authority."  Still unclear: Will CFPA be able to set loan prices and fees? And if CFPA disagrees with traditional government bank regulators, who wins?

2) "The hot-button issue for large financial institutions remains over-the-counter derivative reform." Democrats want to force banks to trade only registered contracts on public exchanges. Republicans are defending the banks' preference for secrecy. If the Democrats win, "the net result (will be) a higher cost of capital." And arguably safer banks.

3) "We view the proposed $50 billion (big-bank) resolution fund to be less of a priority" for Obama, since he wants "to remove from the debate one issue that Repubilcans have been gaining some traction on" (they call it the "permanent bailout fund," though it's supposed to be bank-funded, like FDIC. Ex-Fed boss Paul Volcker's proposal for splitting up commercial (loan) banks from investment (trading and deal) banks has been knocked "off the table," thought it might survive in future-study form.

"There is little upside to this bill for Republicans," says Blank Rome's lobbyist group in its Financial Reform Watch newsletter. They'd rather reform Fannie Mae, Freddie Mac and housing finance, an issue that deeply embarrasses the easy-money Democrats, who are hoping to hold it off until next year, after the midterm elections.