“Giving customers the chance to choose whether they want ‘overdraft protection’ is important,” Senate Banking Committee Chairman Chris Dodd (D-Conn.) said in a statement, “but we need to do far more to protect customers from abusive bank products. We still need to stop the excessive fees, repeated charges, lax notification, and processing manipulation that have become standard in these so-called overdraft ‘protection’ programs.”

Rep. Carolyn Maloney (D-N.Y.) just weighed in with an identical message.

While these rules are a good, solid step forward, they don’t eliminate the need for Congressional action on this issue. The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed’s new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!

Both Dodd and Maloney have introduced legislation that goes a good deal further to protect consumers from overdrafts than the Fed’s new rules. Aside from the opt-in stipulation, those bills would also: (1) cap the number of fees at one per month and six per year; (2) require banks to warn customers at the counter if a purchase would overdraw their account, allowing them to opt out; (3) require that the charge be proportionate to the banks’ cost to process the transaction; and (4) prohibit banks from reordering purchases in order to maximize the number of overdraft fees.

The Fed’s new rules don’t tackle any of those things.

“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.”

“[N]o sooner had it been signed into law, but credit card companies were looking for ways to get around the protections this Congress and the American people demanded,” Dodd said in a statement. “This bill would end those abuses and further protect customers today.”

But Dodd’s bill, by carving out the retroactive rate-hike reform, doesn’t go nearly as far as several separate proposals to expedite all of the credit card reforms passed earlier in the year. The House Financial Services Committee approved that legislation last week, and an identical Senate bill appeared the same day.

Calls and emails to Dodd’s office seeking comment on the larger expedited reform bill were not returned last week. His newly introduced proposal explains why.

“Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Fed Chairman Ben Bernanke said in a statement announcing the moves. “The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”

A separate explanation provided by the Fed goes even further to justify the proposal, saying, in effect, that Wall Street executives can’t be trusted to limit risk-taking on their own.

Recent events have highlighted that inappropriate compensation practices can contribute to safety and soundness problems at banking organizations and to financial instability. Traditionally, banking organizations and supervisors relied on strong risk management, internal controls and corporate governance to help constrain risk-taking. However, the financial crisis has illustrated that the incentives created by poorly designed and implemented incentive compensation arrangements can be powerful enough to overcome risk controls.

The Fed’s plan is to monitor the pay structures of the nation’s banks in order to discourage excessive risk-taking by executives as well as lower-ranking employees, such as traders. The reviews will apply differently to the nation’s 28 largest institutions versus the smaller community banks, with the larger banks subject to more intensive scrutiny.

Federal Reserve Governor Daniel K. Tarullo said the proposal “is but one part of a broad program … to strengthen supervision of banks and bank holding companies in the wake of the financial crisis.”

It was the second wave of bad news to hit Wall Street in 24 hours. On Wednesday, the Obama administration announced plans to slash pay for the top 25 executives at the seven companies that received “exceptional” funding under the Wall Street bailout bill. The average compensation for those 175 executives will be halved, according to U.S. pay czar, Kenneth Feinberg.

Still, neither the administration’s nor the Fed’s limits would cap compensation at these firms, as proposed by some members of Congress earlier in the year. That means that executives at even those institutions propped up with billions of taxpayer dollars could still be in line for multi-million dollar pay packages. The Fed explains why it didn’t include caps:

[O]ne size does not fit all firms or employees. Best practices for balancing risk and rewards in incentive compensation programs continue to develop and are likely to evolve significantly in the coming years….

Further experience may reveal specific compensation practices that may appropriately be required or prohibited.

The Fed-centric congressman — he’s currently selling a new book on the subject, “End the Fed” – has collected 291 co-sponsors, including every single member of the House Republican conference, on the bill. And his biggest allies on the Democratic side of the aisle are Rep. Barney Frank (D-Mass.), the committee’s chairman, and freshman Rep. Alan Grayson (D-Fla.), a lawyer with some libertarian flashes—he reportedly hounded Paul for some face time and a joint appearance when the Texas Republican was in the Orlando area this year.

We will subject them to a complete audit. I’ve been working with Ron Paul, who’s the main sponsor of that bill. He agrees we don’t want to have the audit appear as if it is influencing monetary policy, as that would be inflationary, and Ron agrees on that. We also think that one of the things the audit will show you is what the audit buys and sells.

Paul’s bill has 282 co-sponsors, including every member of the GOP in the House.

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“As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another,” Obama said. “But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

But a second term for Bernanke didn’t inspire the same reaction from everyone. Via Real Time Economics, here’s Andrew Leonard at Salon:

Maybe Obama realizes that the really hard part is only just beginning. Unwinding the vast expansion of the Fed’s balance sheet and figuring out how to tighten the screws on the money supply without plunging the country into an another economic contraction will be a tremendous challenge. Why saddle that grief on some up-and-coming Democratic economist? It’s Bernanke’s mess. Let him clean it up.

Michael Shedlock was much harder on Bernanke, contending that he launched a self-promotional media blitz that led to his successful reappointment. He also included a video compilation of inaccurate statements Bernanke has made about the economy in the past.

Unfortunately, Bernanke’s win is everyone else’s loss.

Many economists included in the Real Times Economics roundup generally supported Bernanke’s reappointment, however. One of the more balanced views came from Calculated Risk, summing up the pros and cons of Bernanke’s tenure:

As Fed Governor Bernanke supported the flawed policies of Alan Greenspan – he never recognized the housing bubble or the lack of oversight – and there is no question, as Fed Chairman, Bernanke was slow to understand the credit and housing problems. And I’d prefer someone with better forecasting skills.

However once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed’s role to provide appropriate liquidity. Bernanke met that challenge, and I think he is a solid choice for a 2nd term (not my first choice, but solid).

Bernanke’s nomination still requires Senate approval, and he’s likely to get tough questions from senators about the Fed’s actions and its expansion of power during the crisis, Bloomberg noted. But Bernanke will very likely be approved, given the almost universal agreement that while he may not have been perfect, he probably did enough to stave off an even more severe financial meltdown. And in a crisis like this, keeping things from getting even worse than they already are is considered a measure of success.

CNBC, which is ostensibly a financial news channel, has upped its number of appearances by a member of Congress whose anti-Fed-centric economic policy has been tutored by Rep. Ron Paul (R-Texas).

In a letter today to Federal Reserve Chairman Ben Bernanke, 10 House lawmakers are asking why Goldman — which last year converted to a bank holding company in order to tap bailout funds — is still allowed to behave largely unregulated, like the investment bank it previously was. The resulting dynamic, the lawmakers conclude, is that Goldman has been granted the best of all worlds: It’s bank status made it eligible for taxpayer-funded gifts — which it’s repaid — while a February exemption from bank regulations allowed it to invest those funds without the risk-limiting oversight of the government.

Despite its exemption from bank holding company regulations, Goldman Sachs has access to taxpayer subsidies, including FDIC-backed bonds, TARP money (since repaid), counterparty payments funneled through AIG, and an implicit backstop from the taxpayer that allowed a public equity offering in a queasy market.  The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money.  This is the very definition of “heads we win, tails the taxpayers lose.”

To its credit, Goldman at least is being honest about its unique position. The company’s Chief Financial Officer David Viniar told Bloomberg earlier this month that, “Our model really never changed.”

“We’ve said very consistently that our business model remained the same.”

Signing the letter were Reps. Alan Grayson (D-Fla.), Ron Paul (R-Texas), Walter Jones (R-N.C.), Brad Miller (D-N.C.), Dan Lipinski (D-Ill.), Elijah Cummings (D-Md.), Tom Perriello (D-Va.), Maxine Waters (D-Calif.), Jackie Speier (D-Cal.) and Maurice Hinchey (D-N.Y.).

The six questions from the lawmakers to Bernanke follow:

1) In the letter granting a regulatory exemption to Goldman Sachs, you stated that the SEC-approved VaR models it is now using are sufficiently conservative for the transition period to bank holding company.  Please justify this statement.

2) If Goldman Sachs were required to adhere to standard Market Risk Rules imposed by the Federal Reserve on ordinary bank holding companies, how would its capital requirements differ from the current regulatory regime?

3) What is the difference in exposure to the taxpayer between these two regulatory regimes?

4) What is the difference in total risk to the portfolio between these two regulatory regimes?

5) Goldman Sachs stated that “As of June 26, 2009, total capital was $254.05 billion, consisting of $62.81 billion in total shareholders’ equity (common shareholders’ equity of $55.86 billion and preferred stock of $6.96 billion) and $191.24 billion in unsecured long-term borrowings.”  As a percentage of capital, that’s a lot of long-term unsecured debt.  Is any of this coming from the Government?  In this last quarter, how much capital has Goldman Sachs received from the Federal Reserve and other government facilities such as FDIC-guaranteed debt, either directly or indirectly?

6) Many risk-management experts, most notably best-selling author Nassim Taleb, note that VaR models can dramatically understate risk.  What is your overall view of Taleb’s argument, and of the utility of Value-at-Risk models as regulatory tools?