Dems vow fight with banks on consumer agency

Representative Barney Frank, chairman of the House Financial Services Committee, holds a field hearing entitled ''Seeking Solutions: Finding Credit for Small and Mid-Size Businesses in Massachusetts'' in Boston, Massachusetts March 23, 2009.

WASHINGTON (Reuters) - Congressional Democrats pledged on Wednesday to engage the banking industry in a summer-long debate over the Obama administration's call for the creation of a U.S. Consumer Financial Protection Agency.

The proposed agency has swiftly emerged as the most controversial aspect of President Barack Obama's broad plan to reshape U.S. financial regulations in response to the deepest banking and capital markets crisis in generations.

Another part of the plan is giving the Federal Reserve the job of regulating overall, or systemic, financial risk in the economy. The White House sent legislative language on this provision to Congress on Wednesday.

On Thursday, it plans to send lawmakers drafts on consolidating bank regulation and empowering the government to seize and shut down troubled firms, leaving only a proposal on regulating over-the-counter derivatives.

"Once we have sent up the derivatives language, we will have sent up draft legislation on each element of the president's regulatory reform plan," Assistant Treasury Secretary Michael Barr told reporters. He said that language would reach lawmakers before their planned August recess.

Rebounding from the financial crisis after massive taxpayer aid, big banks are unleashing swarms of lobbyists onto Capitol Hill to try to block the CFPA, which would threaten their profits, and which they say would compromise bank oversight.

The banks' "highest priority is killing this agency ... I've been disappointed with that," said Representative Barney Frank, chairman of the House Financial Services Committee, at a news conference where Democrats launched a pro-CFPA campaign.

Backed by a coalition of public advocacy groups, the campaign marks the first open clash between supporters of the Obama reforms and the financial services industry, which until recently had been relatively quiet about its objections.

CHAMBER OPPOSES 'NEW LAYERS'

"We will support efforts to ensure consumers have the information they need and are protected," said Thomas Donohue, president of the U.S. Chamber of Commerce, the country's largest business lobbying organization.

"We will oppose efforts that fail to address the weaknesses of our current regulatory structure by simply adding new layers of government," Donohue added in a statement.

Frank's committee has postponed a session to draft and vote on the CFPA proposal. It had been set for next week, but it was put off until September, raising the prospect the administration's regulatory push was getting bogged down.

Treasury's Barr said, however, the administration believed things were on track. "The overall trajectory of reform here I think is quite strong," he said.

Frank said the banks want "a big national debate over this and so that's what we're going to have," adding that while the banks say they support reform, they have "point by point" opposed specific proposals, including the CFPA.

Democratic Representative Brad Miller said the CFPA would protect consumers from high fees, deceptive marketing and other unfair practices of banks and financial firms that allow them to continue making "vulgar profits and compensation."

"So, of course, they're against it," Miller said.

Federal Reserve Chairman Ben Bernanke testified to the Senate Banking Committee on Wednesday and sought to defend the central bank's record on handling its consumer protection responsibilities.

The Fed, and six other federal agencies, would be stripped of such duties under Obama's CFPA proposal to centralize financial consumer protection under one new organization.

"Our regulators have absolutely ignored consumers," said Democratic Representative Maxine Waters at a news conference.

While Bernanke admitted that the Fed had not done as good a job as it should have protecting consumers in the past, he made a concerted pitch to keep these responsibilities, telling lawmakers the Fed would take these duties very seriously.

OTC DERIVATIVES LANGUAGE COMING

Frank's committee heard details on the administration's thinking on how to treat over-the-counter derivatives at a hearing with the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

CFTC Chairman Gary Gensler told lawmakers that all derivatives dealers should face capital, margin, conduct and record-keeping rules. He urged bankruptcy law changes to protect against dealer insolvencies and position limits for CFTC-regulated OTC derivatives that affect price discovery.

Democratic Representative Paul Kanjorski said at the hearing that the views of Gensler and SEC Chairman Mary Schapiro would help Congress "to sensibly regulate this dark corner of our financial markets."