Jul 21, 2010

"November 10, 2009 was a dark day in annals of the Federal Reserve. Sen. Christopher Dodd, the chairman of the Senate Banking Committee, went before the microphones and minced no words: the central bank's role in the preventing the financial crisis had been an 'abysmal failure' and the Fed should get out of the bank-regulating business entirely.

Dodd went on to outline his sweeping financial reform bill to gut the Fed's oversight of banks -- powers that had been painstakingly won in almost two decades of turf wars by Fed chief Alan Greenspan, who reigned unmatched over Wall Street and the financial system.

'I really want the Fed to focus on its core enterprise and do what it was designed to do, which is monetary policy,' Dodd told reporters.

Flash forward to July, 2010.

Far-reaching bank reform legislation has been approved on Capitol Hill that will be signed into law on Wednesday by President Barack Obama.

Instead of being left out in the cold under the new banking law, the central bank's sweeping authority over banks remains intact. In some cases, the Fed even won expanded authority.

'The Fed is the big winner among regulatory agencies as Dodd's bill evolved over time,' said Richard Coll, of counsel at DLA Piper LLP.

'History will mark this down as a major milestone for the Fed. There had never been as many major threats to the Fed's independence and its powers, and the Fed turned them back,' said Bob Litan, vice president for research and policy at the Kauffman Foundation in Kansas City.

After the bill is signed on Wednesday, Fed chairman Ben Bernanke will then go before Congress to discuss monetary policy and the health of the financial system. His testimony will begin at an unusual time of 2:00 pm Eastern.

And the Fed chairman has solidified his standing since his last report to Congress in February when lawmakers were still squabbling over the future of the central bank.

What happened?

Dodd was pretty straightforward in his assessment of his retreat.

'To be blunt, that draft bill contemplated removing all of the Fed's authority in areas where it had performed poorly, leaving it with responsibility primarily over monetary policy,' Dodd told new Fed nominees at a public hearing last week.

'However, as we worked through the legislative process, it became clear that the political will of the Congress was to retain and strengthen the Fed's supervisory role.'

Interviews with experts who followed the legislation closely indicate that a confluence of effective arguments, key allies and lucky breaks helped resurrect the Fed. Accidents of history also played a major role.

Dodd began to lose the fight soon after his November press conference when senators went home for Christmas. There, they were met by the Fed's shock troops -- members of the 12 regional Fed district bank' boards of directors.

The Fed structure, a political compromise in 1913, is an anomaly for a central bank. There are seven Fed governors in Washington and 12 regional Fed banks scattered in big cities across the country. These banks also have regional boards in other key cities in their regions.

So the Fed, like community banks or auto dealers, has an effective grass-roots network, which hit back hard at Dodd.

Analysts said the Fed had an effective argument.

'Fed officials made the case that oversight of banks and watching for financial crises and the last resort lender for the financial system were all 'inextricably linked,' said Charles Taylor, director of the Financial Reform Project at the Pew Charitable Trusts."

Click to go the Market Watch website and read the entire article.