“Things were a lot better for the average person in this country when we had usury caps,” Rep. Louise Slaughter (D-N.Y.), head of the House Rules Committee, said in a statement announcing her bill. “Watching how credit card companies have exploited people by increasing rates up to 30 percent and more is criminal and this bill will allow us to put an end to this practice.”

Massachusetts Democratic Reps. John Tierney  and Michael Capuano will co-sponsor the bill.

They have a tough road ahead, for several reasons. (1) Even though it was the finance industry that was primarily responsible for the recent global economic meltdown, there’s a growing reluctance on Capitol Hill to apply strict new regulations just as the banks are re-stabilizing — a circumstance the banks are already celebrating. (2) Although Congress was successful in passing sweeping credit card reforms in May, an amendment to cap interest rates at 15 percent was killed in the Senate. And (3) the banks aren’t going to allow Congress to squeeze a profit source without coming up with creative ways to make up the difference elsewhere. This, The New York Times reported yesterday, is what’s happening in Australia, where card issuers have responded to new regulations by attaching new fees to airline tickets, among other purchases.

“[I]f regulators limit one fee or rate, banks are likely to find another way to keep revenue flowing,” The Times wrote.

“The final overdraft rules represent an important step forward in consumer protection,” Fed Chairman Ben Bernanke said in a statement. “Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service.”

Threatened with congressional reform, some banks have already taken it upon themselves to operate more transparent overdraft protection programs. But the banking industry on the whole has opposed the idea, arguing that the overdraft protections benefit consumers by allowing them to make purchases even when accounts have run dry.

The industry has good reason to oppose the changes. Overdraft fees — which now top $30 apiece, on average — have evolved into a $38 billion-per-year money-making venture for the banks, according to Moebs Services, an Illinois-based financial research firm.

The Fed’s new rules take effect next summer.

Finance leaders in both chambers of Congress have introduced legislation to protect consumers from overdraft abuses. Aside from requiring customers to opt-in to the protection program, those bills also cap the number of overdraft fees allowed per year and prohibit banks from manipulating the chronology of purchases in order to maximize the number of overdraft fees — items the Fed’s new rules don’t address.

No word yet if the sponsors of those bills — Rep. Carolyn Maloney (D-N.Y.) and Sen. Chris Dodd (D-Conn.) — are satisfied with the Fed’s reforms or will keep pushing forward with their own, stronger consumer protections.

On several key points, though, Dodd breaks sharply from the White House. Most notably, the Senate Banking Committee chairman wants to create yet another agency to police Wall Street, rather than expanding the powers of the Federal Reserve in that role, as Treasury Secretary Tim Geithner has argued is necessary.

The Washington Post examines the significance:

[O]n key points Dodd’s bill breaks with the administration and with the House version of the legislation. The administration favors increasing the Fed’s regulatory powers and preserving the regulatory responsibilities of the Federal Deposit Insurance Corp. Dodd wants to strip both agencies of their powers.

Dodd’s differences with the House and the administration could reduce the chances that Congress can complete work on financial reform by the end of the year, a stated goal of Democratic leaders.

“Dodd,” the Post added, “said he hopes to begin the formal process of approving his bill during the first week of December.”

Senate Majority Leader Harry Reid (D-Nev.) has asked members of the Banking Committee for their consent to move the bill directly to the Senate calender without the panel addressing it first. The move is an indication that Democratic leaders want the option to consider the bill at any time, though it doesn’t guarantee that they’ll do so.

There’s no word yet from Banking leaders if that consent has been granted. Still, the strategy is significant because if Republicans want to block the motion, they’ll have to go on the record to do so.

The legislation, sponsored by Sen. Mark Udall (D-Colo.), is designed to tackle a problem the Democrats themselves created.

The credit card reform legislation that Democrats pushed through Congress in May aims to eliminate the most abusive practices adopted by credit card issuers. It bans, for example, a number of hidden fees and prohibits companies from applying rate hikes to existing balances. Yet most of those reforms don’t take effect until late February. To beat the deadline, many companies have raised fees and rates while it’s still legal to do so.

So now Democrats, themselves responsible for delaying the reforms, are trying to get them installed more quickly. The House on Wednesday passed a bill to bump up the implementation date to Dec. 1. The Udall bill proposes the same expedited timeline.

Stay tuned…

This week, Rep. Barney Frank (D-Mass.), the House Financial Services chairman whose systemic-risk legislation includes the after-the-fact fees urged by Geithner, says he’s now leaning toward the Bair plan. Indeed, The Wall Street Journal reports today that “a Frank aide on Friday said he now favors amending the measure to create a prepaid fund.”

There will be plenty of time to make the changes. Frank’s committee will meet tomorrow to begin marking up the bill, with debate on amendments not expected until Thursday, the Journal reports. No doubt some lawmakers are drooling at the chance to tweak the bill.

Cantwell ripped into the financial reforms put forth by Geithner and the Obama administration as “appalling” for including alleged loopholes and exemptions for large financial institutions in legislation overhauling the regulatory framework for the nation’s top firms.

“I’m not sure,” Cantwell said during an appearance on MSNBC this morning when asked by host Dylan Ratigan why Geithner still has a job.

And yesterday on NBC’s “Meet the Press:”

“What the Treasury secretary basically said was that, yes, banks should take more risks and we should continue the loopholes,” she said. “And that’s really appalling because right now, we know that lack of transparency has caused this problem with the U.S. economy, and Wall Street is continuing, one year later, with the same loopholes.”

It won’t be easy for the Obama administration to push through legislation if it can’t even convince its own party to support it.

A timely, orderly resolution process that could be applied to both banks and non-bank financial institutions, and their holding companies, would prevent instability and contagion and promote fairness.

But Bair, echoing a common message from House lawmakers, is opposing a provision to reimburse taxpayers for bailouts by taxing the solvent competitors of the bailed-out firm — a tax the White House wants to apply only after the government steps in to euthanize the troubled company. Treasury Secretary Tim Geithner said yesterday that collecting the tax beforehand — effectively creating an insurance fund to pay for industry bailouts — would only encourage large institutions to make the risky bets that were largely responsible for the recent global collapse.

People will live the expectation where the government will come in and protect them. We don’t want to create that expectation. That’s why we think it’s better to do it after the fact.

Bair disagrees. “To be credible, a resolution process for systemically significant institutions must have the funds necessary to accomplish the resolution,” she told lawmakers.

It is important that funding for this resolution process be provided by the set of potentially systemically significant financial firms, rather than by the taxpayer.  To that end, Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms — those with assets of at least $10 billion.

The reason to pre-fund?

It allows all large firms to pay risk-based assessments into the FCRF, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.

There’s still a long ways to go to iron out these differences. The “too-big-to-fail” bill unveiled this week by House Financial Services Chairman Barney Frank (D-Mass.) is just a discussion draft. The actual language isn’t expected until next week, when a markup is also likely. Expect a lot of amendments.

Treasury Secretary Timothy Geithner (WDCpix)

Appearing before a House panel on Thursday, Treasury Secretary Tim Geithner made his best pitch for legislation granting the White House broad new powers to seize Wall Street firms when their collapse might torpedo others in the industry.

It didn’t go so well.

Image by: Matt Mahurin

“Mr. Secretary, I’m not a man that fears this administration or you,” Rep. Paul Kanjorski (D-Pa.) told Geithner. “But I do fear the accumulation of power exercised by someone in the future that can be extraordinary.”

Rep. Brad Sherman (D-Calif.) echoed those concerns, arguing that the bill represents “the most unprecedented transfer of power to the executive branch to make decisions about both spending and taxes in history — all without congressional approval.”

The tone of the comments could foreshadow a tough road ahead, not only for the White House, but for Financial Services Chairman Barney Frank (D-Mass.), who introduced legislation this week that grants the Treasury’s request to broaden the president’s “resolution authority.” The bill is one of the final pieces of the finance-reform puzzle that Frank has been putting together all year. But by conceding most of the administration’s requests, the Massachusetts Democrat — who asked no questions of Geithner Thursday — has riled others on his panel, who want to see more taxpayer protections in the bill.

Frank’s proposal would create an oversight commission to monitor and regulate Wall Street’s investment houses and other non-bank institutions to ensure that they’re on solid footing. Federal regulators could, for example, force companies to increase capital reserves or decrease the amount of debt they’re holding, if the scenario was deemed a threat to topple the firm.

The bill would also empower the White House to swoop in and dismantle failing Wall Street institutions in order to minimize the impact on the finance system as a whole — a strategy modeled on the authority of the Federal Deposit Insurance Corporation to intervene when commercial banks are threatening to fall.

To protect taxpayers, Frank’s bill aims to have failed-company shareholders and creditors cover the cost of the government help. If more money is needed, taxpayers would initially pick up the tab, to be reimbursed later by an after-the-fact tax levied against other large Wall Street institutions that would presumably benefit from the stabilizing effects of the government intervention.

Supporters maintain that the proposal does not empower bailouts at all, but would simply allow the government to manage the deaths of failed companies so they don’t drag down the financial system with them — a kind-of controlled euthanasia designed to protect consumers from the hubris of the finance industry.

“If we do have to step in, it will be very painful for those companies” Frank told MSNBC Thursday. “They will be put out of business. The CEOs will be fired. Shareholders will be wiped out. We are not going to have a situation where people can expect to be bailed out and live happily ever after.”

Geithner, for his part, denied that the proposal authorizes the White House to tap federal coffers at all. Asked by Rep. Maxine Waters (D-Calif.) if the bill grants “the authority to spend the taxpayers’ money to bail them out if you deem that to be a good way of handling that situation,” the Treasury secretary answered with one word: “No.”

Yet the House bill empowers the administration to make loans, buy assets, and invest in failing institutions if regulators determine those steps are required to prevent “serious adverse effects on financial stability or economic conditions in the United States.” To do so, of course, the White House would use taxpayer funds. And no monetary limits are specified.

And while the bill aims to recover the taxpayer dollars within 60 months of the bailout, Sherman notes that the White House would also have the authority to extend that deadline indefinitely.

“It could be 60 years,” he said.

That these bailout protections are limited only to those institutions whose failure is deemed a system-wide threat is another source of criticism on Capitol Hill. Many lawmakers and finance experts contend that that stipulation creates an unfair advantage for big firms over their smaller competitors. For example, they could get capital at lower rates if lenders know they have access to some level of federal lifeline. That dynamic, critics argue, would act to promote “too-big-to-fail” institutions, rather than reining them in.

“Why should the American people have to sit out there and see us creating mammoth organizations that nobody says we have the authority to control or limit, but we have the authority to help them when they get into trouble?” asked Kanjorski.

There are still other concerns. For example, some lawmakers are attacking the proposed bailout tax on large institutions, arguing that it should be collected beforehand as a type of insurance fund, rather than imposed after a competitor goes under.

“No more TARP. No more bailouts,” said Rep. Luis Gutierrez (D-Ill.). “Let them [the companies] create the fund, the systemic risk fund, that will guarantee that the American taxpayer will no longer have to be involved should they cause such a crisis ever again.”

Geithner responded that such a system would encourage even more risky behavior from the largest companies. “If you create a fund in advance, there’s a risk you’re going to create more moral hazard,” Geithner siad. “People will live the expectation where the government will come in and protect them. We don’t want to create that expectation. That’s why we think it’s better to do it after the fact.”

Meanwhile, conservatives and representatives in the finance industry are blasting the notion that solvent companies should be forced to pay to bail out the mistakes of competitors. “Should Ford bear the costs of compensating the taxpayer for what happened to G.M. and Chrysler?” asked Rep. Jeb Hensarling (R-Texas.).

Gutierrez pointed out yet another concern: Placing such broad new powers in the hands of Treasury leaders – who often arrive directly to the job from previous positions of power on Wall Street – creates the impression of the fox guarding the hen house.

“How do we know the next secretary of the Treasury won’t be the former CEO of Goldman Sachs as they have been in the past?” he asked. “They seem to be interwoven, and that’s what the American public sees.

“They see the interconnectedness in terms of their power, their influence and always to their benefit.”

The first, sponsored by Sen. Mike Johanns (R-Neb.), would fund the extension using unspent stimulus money, rather than extending a small surtax on employers, as Democrats have proposed. The second, sponsored by Sens. John Thune (R-S.D.) and Robert Bennett (R-Utah), would eliminate the authority of the White House to extend the Wall Street bailout past its expiration date. (Under current law, TARP is scheduled to expire at the end of 2009, but the Treasury Department has the authority to extend it to Oct. 10, 2010.)

Party leaders have already reached agreement on the third, which seeks to end the federal ownership of bailed-out firms by assigning non-partisan trustees to manage them — a provision sponsored by Sen. Bob Corker (R-Tenn.) and Mark Warner (D-Va.).

The Treasury Secretary went on to say that the what’s being requested is merely “the authority to wind them [failed companies] down.”

What he didn’t mention is that the winding down will require taxpayer dollars, at least in the early phases of a takeover.Those losses are designed to be recovered within 60 months by tapping shareholders and creditors, and if necessary by imposing an after-the-fact tax on other large and solvent institutions. Yet the provision also allows the government to extend that 60-month recovery window indefinitely.

“It could be 60 years,” said Rep. Brad Sherman (D-Calif.), in response to Geithner.

“Further,” Sherman said in a statement yesterday, “it is difficult to see how any tax on financial institutions would provide hundreds of Billions of revenue, which might be needed to repay a large bailout.”