Yesterday, industry representatives held a conference call with reporters boasting about just how effective they’re fight against the proposed reforms has been. Washington Post columnist Dan Milbank today captures the essence of the industry’s reasoning:

[T]he argument most likely to prevail for the financial firms on Capitol Hill was offered by Chris Stinebert, [head of the American Financial Services Association]. “Especially now, when we’re in a very, very sensitive time, when the capital markets are just starting to recover,” he said, “introducing a high level of uncertainty in the marketplace could be very detrimental.”

Most of America, though, will have a tough time sympathizing with the alleged misfortunes of Wall Street firms, some of which are posting record profits at the same time that unemployment continues to leap.

With that in mind, Milbank offers his translation of Stineberts argument:

[T]o put it another way: Don’t regulate us now because the economy is still suffering from the mess we made because we weren’t regulated the last time. Chutzpah, it appears, is recession-proof.

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.

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 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.”

House Democrats introduced legislation Tuesday granting the White House broad new authority to bail out investment houses and other non-banks when their potential collapse is a threat to the larger financial system. But while the bill goes far beyond a similar White House proposal in terms of protecting taxpayers, Rep. Brad Sherman isn’t impressed. The California Democrat, who said the White House proposal represents “TARP on steroids,” issued a statement last night claiming that the House bill is little better.

“The new resolution authority,” Sherman said, “provides permanent, unlimited bailout authority” granting “unprecedented powers for the executive to decide spending and taxes, without congressional approval.”

Under the House bill, sponsored by Financial Services Committee Chairman Barney Frank (D-Mass.), the White House would have the power to swoop in and dismantle failing Wall Street institutions in order to mitigate the negative effects on the finance system as a whole — a model designed after the authority of the Federal Deposit Insurance Corporation to intervene when commercial banks are poised to topple. To protect taxpayers, Frank’s bill attempts to force the tab ultimately on failed-company shareholders, as well as on other large Wall Street institutions that would presumably benefit from the general stability created by the government intervention.

Frank said his proposal would “ensure that the industry and shareholders absorb the risk and cost of failure, not taxpayers.”

But Sherman doesn’t see it playing out that way.

The taxpayer losses are supposed to be recovered from a new tax imposed on large and medium-large financial institutions.  The statute requires the Executive Branch to recoup taxpayer funds within 60 months, but then, allows them to extend this period for as long as they want. (§1609(o)(1)).  Further, 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.

And it’s not only trouble companies that could receive help under the House bill. Indeed, it would allow the president to loan solvent institutions unlimited funds “if necessary to prevent financial instability.”

When bailout funds are lent to a solvent financial institution under §1109, the executives and shareholders lose nothing.  Executives keep their jobs and their compensation packages; shareholders retain all their rights.  In contrast, when a troubled institution receives a bailout under §1604, some executives lose their jobs, and shareholders have to stand behind taxpayers.

That creates a moral hazard problem, Sherman argues, “allow[ing] those institutions which are clearly systematically important (the top 10 to 25) to borrow at a lower cost. This will help the largest institutions get bigger, so they can pose a greater systemic risk.”

The Financial Services Committee is holding a hearing on the bill this morning, with Treasury Secretary Tim Geithner testifying. There’s been no love lost between Sherman and Geithner in the past. Should be a good show.

So after some Democrats initially delayed the implementation date until next year — a naked bow to the banking industry — others are now trying to change the implementation timeline so the reforms take effect sooner.

Indeed, the House Financial Services today is marking up legislation to do just that. The bill, sponsored by Reps. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.), would expedite the reforms so that they kick in Dec. 1 — 12 weeks earlier, for most provisions, than the existing law.

Boosting the effort, Sen. Mark Udall (D-Colo.) today introduced an identical proposal in the upper chamber.

Outside of the legislative effort, Democrats have been urging the Federal Reserve, which is responsible for implementing the legislation, to expedite the reforms on its own. But Fed Chairman Ben Bernanke told lawmakers this week that, while the quicker start date “could provide benefits for consumers, the [Fed] continues to believe that, given the breadth of the changes required by the [law], card issuers must be afforded sufficient time for implementation to allow for an orderly transition.”

In a letter to Rep. Spencer Bachus (Ala.), senior Republican on the Financial Services Committee, Bernanke also claimed that expediting the reforms unilaterally would steal an opportunity from the public and the card companies to comment on the change.

That response riled Sen. Charles Schumer (D-N.Y.), who said this week that if the Fed doesn’t make the changes, “we should quickly pass legislation in both the House and Senate to do so.”

Stay tuned…

That’s not all. At Naked Capitalism, guest poster George Washington says the financial industry lobbyists aren’t just trying to kill new laws – they’re actually trying to weaken existing regulations, citing Robert Borosage’s similar argument.

And this is only after the first day of the committee’s hearings.

Good to see how much President Obama has changed the culture of Washington.

Now, some other Democrats want to expedite the same rules their colleagues delayed. Reps. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.) have introduced legislation to bump up implementation date for most of those reforms from late February to December 1. The House Financial Services Committee, headed by Frank, has scheduled a hearing on the bill next Thursday.

Brooksley Born, who fought unsuccessfully to regulate derivatives during her years at the helm of the Commodity Futures Trading Commission (CFTC), singled out “the failure of government to oversee the financial markets” as a central cause of the meltdown that began last year. “Experience has now clearly shown that financial markets cannot self-regulate,” Born said, urging her colleagues on the panel to “identify and examine regulatory gaps and failures so that they may be eliminated.”

But while Born urged Congress and the Obama administration to press ahead with strong new rules of the road for Wall Street, fellow commissioner Keith Hennessey declared that reform legislation has a slim chance of passing this year.

Still, Hennessey added, the panel’s deadline of December 2010 to release its final report risks making its conclusions irrelevant.

“We cannot predict when Congress will act, but we’ve been given a job to do and part of that job is to be as useful to lawmakers as possible,” said Phil Angelides, the panel’s Democratic-appointed chairman. Members of the Financial Crisis Inquiry Commission, as the panel is formally known, will “structure our work with knowledge of the congressional calendar,” Angelides added.

Lawmakers originally hoped that the House would act on regulatory reform before the fall, but the House Financial Services Committee postponed its vote on the White House’s proposed Consumer Financial Protection Agency, likely until next month. The decision of Senate Banking Committee Chairman Chris Dodd (D-Conn.) to retain his gavel has been seen as a boost for financial reform’s prospects in the upper chamber, but FCIC members stressed the importance of keeping their work connected to — and independent from — the action on Capitol Hill.

“There’s no question that this commission had a political birth,” quipped former House Ways and Means Committee Chairman Bill Thomas (R-Calif.), now the FCIC vice chairman. But, he noted, one can stay defined by one’s birth or “get on with your life.”

Speaking to reporters after the FCIC’s first meeting, Thomas offered his own prediction that Congress would ultimately come down harder on a financial industry that is still weighing how much systemic risk to embrace. “It isn’t whether there will be regulation or not,” Thomas said. “It’s whether it’ll be regulation for the sake of regulation.”