<em>TAP</em> Talks with Sen. Warner

Senate Democrats forced financial-reform legislation to the floor this week, past a Republican caucus intent on filibustering the bill. The GOP, joined by Democrat Ben Nelson, blocked the overhaul three times before conceding that the legislation should proceed through an open amendment process. Thursday night, TAP spoke with two Democratic senators who have been deeply involved with the effort, Ted Kaufman and Mark Warner.

Warner, a former congressional staffer and venture capitalist who led Virginia's Democratic revolution as a centrist two-term governor before moving to Washington, worked closely with Banking Committee Chairman Chris Dodd and Republican Bob Corker to craft the financial-reform bill.

You've worked very closely with Chairman Chris Dodd and Sen. Bob Corker to create the authorities in this bill that would liquidate a failing bank instead of bailing it out. It's been criticized as too hard to do, especially internationally. How do you answer those criticisms?

Before you even get to resolution -- hopefully, resolution will rarely if ever be used; we want to keep a preference for bankruptcy -- we have given the systemic risk council a variety of tools: higher capital requirements, looking at their leverage, etc. One is a whole new category in the capital structure, contingent debt that would convert to equity even before the crisis came if you fall into a gray zone. [That] is a way to put a check on some of your international activities that we may not be able to reach. If there's something that's looking a little shaky, this is a hammer that can be brought on management.

The real tool, this is before resolution, is the funeral plan provision. We'll have to set a template that really works, but this gives the regulators the ability to pre-bless and review on a regular basis how an international organization [can be liquidated in the event of failure]. You need to check, if your headquarters got into problems, how you would unwind those international subsidiaries without capital washing from America to those, or those being ring-fenced by bankruptcy provisions. You give the tool to the regulator and the systemic risk council, if these plans don't meet muster, to break off international operations. This area has potentially a lot of teeth to it.

If you get to resolution, whether it's pre-funded or post-funded, you've got an ability to keep the institution operating for a long enough time so you don't have a run. The crisis that starts in New York doesn't spread to your Japanese operation and somehow the Japanese government puts their bankruptcy fence around it.

Is that too technical? I've spent 20 years around the finance market ... I know I've become a finance-techie dweeb around this step.

I'm happy to hear we have finance-techie dweebs working on this in Congress! A lot of what we're talking about with regard to resolution relies on regulators making the right decisions, and recently we haven't seen a lot of that. How do you answer people who worry too much discretion will lead to regulatory inaction?

My fear, even with well-intentioned regulators, is that the resources on the capital-markets side are going to be so much greater. The best end-user exemption possibly written [to allow businesses to use derivatives while preventing financial speculation], you've got to assume within one or two or three years, people are going to find ways to go around it. Let's try [to] get the incentives right. That still has the regulators set the rules, but we've forewarned the industry that the regulator will act.

In conversations with folks around the derivatives space, I have some concerns that moving [derivatives trading] outside of the banks could lead to greater consolidation, and that there are some appropriate hedging activities that banks should be able to do within their own operation.

To get the incentives right on end-user exemptions, so the finance industry is trying to adhere to the rules and not simply find a way to get around them, you might have some of the more draconian consequences take place if someone trips the wire. If more than 20 percent of a bank's contracts [take advantage of the exception], I'm not saying that's the right tripwire, then you would stipulate that the regulator shall take certain action and not give them as much discretion. It happens with some precipitating event.

Is there anything like that tripwire mechanism in the current bill?

I'll just say, it's "in process."

Sherrod Brown and Ted Kaufman have proposed legislation that would cap the size of banks and make them smaller. Is that something that you would support?

I have enormous respect for both Sherrod and Ted. I've not been convinced. I'm not sure size is always the major factor; sometimes it is interconnectedness and the risk profile. Canada's got a higher concentration in the banking industry than the U.S., but they didn't experience the same level of crisis -- but they actually had regulators who looked at leverage rates. We'll keep talking.

What else do you see coming as the amendment process begins?

Republicans … don't like the idea that the resolution fund is pre-funded, and I think Treasury probably agrees with them. If we can start building more of a bipartisan consensus on this bill, [this is] one of the areas where they'll probably be some amendment. There could be a change around that issue as long as the taxpayer is protected, and there is going to be some resources available, so you've got an orderly way to put one of these major institutions out of business, and it's not a repeat of Lehman in '08. I think that some of the hypocrisy of the criticism is, if you had zero [initial funding for resolution], there would have been a critique: "That means, oh my God, the Treasury's borrowing, the taxpayers won't get repaid."

As you mention, you had a long career in business before coming into politics. With that perspective, how do you sell the Consumer Financial Protection Agency to your colleagues who might be skeptical of it? I've heard Republicans say this bill will affect barbers and dentists.

It's a little bit of a red herring, this notion that dentists are going to be regulated by this consumer agency. There's a way to make sure that this doesn't creep into people who are not normally in the business of doing financial transactions. I'm not seeing anything in the bill that says, "Here's how the dentists get stuck."

I do think there is a legitimate point, around particularly smaller banks. When you have enforcement of the consumer rules, that ought to be done in conjunction with the prudential supervisor, so you don't have one set of regulators coming on Monday and another set coming on Tuesday giving you conflicting advice.

A little bit of the irony is the very same community banks say "don't over-regulate us, but please make sure you've got a strict consumer law against the unregulated sector of the industry." If we're going to regulate financial products, we ought to regulate on the nature of the product and not on the charter of the organization. There is a way to not unduly burden community banks but at the same make sure the mortgage brokers and the payday day lenders [have] stronger rules. We're most of the way there on this.

You worked closely with Sen. Bob Corker on parts of this bill. What did he bring to the table, and how do you get Republicans involved?

I hope to keep him involved. There are some members of my caucus who may not agree with me that we've got to get a broad bipartisan bill. For the sake of predictability for the market and the notion that we ought to have rules of the road that are going to last for decades, not for a year or two, if we can find common ground, we ought to do it. I don't think these issues traditionally break down on a Democrat/Republican continuum. If you start with the same goals, so much of this gets technical, people can work through it.

If you get it past the talking points, I think we can get something resolved here. I go up to my Republican colleagues and say, "Where's the bill say that?" Eighteen months after the meltdown on Wall Street, I've got to believe most elected officials think its pretty much the right time to set new rules of the road.

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