Federal Reserve comes in from Senate deep freeze

The Federal Reserve, once in danger of being stripped of its bank supervision powers by the Senate, is getting a second look from key lawmakers amid a new flurry of bipartisan negotiations over a massive overhaul of the rules that govern Wall Street.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., and Republican Sens. Richard Shelby and Bob Corker are now looking at letting the Fed keep some of its regulatory authority after all.

"The question before the committee is, do we exclude the Fed entirely or do we bring them back, keep some type of regulatory authority...with the Fed," Shelby said Thursday. Shelby has been one of the main critics of the Fed's conduct as a banking regulator.

The surprise second-look comes as Shelby, who had reached a negotiating impasse with Dodd two weeks ago, re-entered the talks in a meeting with Dodd late Wednesday. Dodd had been negotiating with Corker since he and Shelby deadlocked. It also comes as Fed Chairman Ben Bernanke, testifying to the Banking Committee, and Treasury Secretary Timothy Geithner, meeting privately with banking industry officials, made a vigorous case Thursday for retaining the Fed's regulatory authority.

What role the Fed plays in regulating banks is important because it acts as the industry's lender of last resort and sets key interest rates that affect the pulse of the economy. It supervises bank holding companies and state chartered banks. Bankers in particular want the Fed to retain its regulatory authority, arguing that without it the Fed would be handcuffed in setting monetary policy.

Two people familiar with Geithner's meeting with industry officials Thursday said the treasury secretary assured them that he agreed and would work to keep the Fed's regulatory powers. The sources spoke on the condition of anonymity because the discussion was private.

Amid the movement on the Fed, the fate of a consumer financial protection entity remains a key sticking point in the Senate negotiations, sharply dividing Republicans and Democrats. President Barack Obama has called for an independent Consumer Financial Protection Agency to regulate and enforce rules aimed at guarding consumers in their financial transactions.

The White House on Thursday signaled that it could accept a consumer entity that is not freestanding, but set conditions that Republicans might still find objectionable. "Our top priorities on CFPA are ensuring the bill includes independent appointment, an independent budget and an independent ability to set and enforce clear rules of the road to protect American families," said Jennifer Psaki, the White House's deputy communications director.

One proposal under discussion in Dodd's negotiations would create a bureau within Treasury or within an overarching bank regulator that would have authority to write consumer rules. Such an agency could be similar to the Office of the Comptroller of the Currency, which is a bureau of the Treasury but is led by a presidential appointee and operates with its own independent budget.

The new tempo of negotiations raised hopes that Dodd might be able to announce a bipartisan bill early next week, more than a year after a panic swept across Wall Street nearly causing a disastrous financial collapse. At the same time, with several pieces unsettled, the talks could still come undone.

"We agree on a lot of stuff," Shelby told reporters Thursday. "Conceptually, I think Sen. Dodd and I probably agree on 90 percent."

The remaining 10 percent is crucial, however, and represents the difference between a bill and a partisan confrontation. Even if the Obama administration is prepared to accept something other than a free-standing agency, Dodd, Shelby and Corker still appear divided on what regulatory authority a consumer entity would have.

"If we can work out the consumer finance deal — if we can — I believe we'll get together on a bill," Shelby said. "If we don't, I guess we'll be politically estranged."

Shelby tipped his hand on his thinking about the Fed as he questioned Bernanke at Thursday's hearing. "What would you do as chairman of the Board of Governors of the Fed if you were — if the will of Congress was to give the Fed another opportunity to be a regulator?" Shelby asked.

Sen. Jack Reed, D-R.I., a banking committee member who has been involved in some aspect of the talks, said there is an emerging consensus within the committee that the Fed should lose its supervision of state-chartered banks to the Federal Deposit Insurance Corp.

But, he added: "There is a real serious question, substantive question, about bank holding companies, large bank holding companies."