Fed Ex-Vice Chairman Fears Congress May Not Pass Reform

(Dow Jones) Former Federal Reserve Vice Chairman Alan Blinder said Friday he fears Congress will fail to act to revamp the financial regulatory system, calling it a "tragedy."

"An astounding fact to me is we are still here in March 2010 and we've done nothing in the way of financial reform," Blinder said in a speech at the Futures Industry Association. "I'm not very optimistic about getting good financial reform, which is a tragedy," he later added.

Blinder's comments came in reaction to a major setback Thursday when Senate Banking Chairman Christopher Dodd (D., Conn.) announced he plans to push ahead with a bill without support from Republicans. Senate Banking member Bob Corker (R., Tenn), which whom Dodd had been negotiating, said one of the snags in developing a bill came over how to craft new rules for over-the-counter derivatives and which transactions should be exempted. But he blamed pressures over the health care bill as the reason for the "pause" in the talks.

If Congress fails to move forward, Blinder said, it will be up to the regulators to step forward and take actions on their own even though they will still be limited on what they can do without additional authority.

Blinder spoke about several big issues that are on the table before Congress, saying he supports the creation of a systemic-risk regulator and thinks that role should go to the Fed.

He also endorsed the concept of the Volcker rule, which would place major restrictions on banks' ability to own hedge funds and do proprietary trading, but questioned how such a concept might be implemented. He said the rule should only be applied to financial firms that have a "claim on the public purse."

"I don't want those institutions gambling with the taxpayers' money," Blinder said. "If you have no claim on the public purse, which still accounts for virtually every hedge fund...then I don't worry about it."

But to actually write regulations that place restrictions on proprietary trading would be tough, he added, because it might be too hard to determine which trading is considered proprietary.

Later at another panel discussion on the regulatory overhaul, a regulator at the U.S. Commodity Futures Trading Commission also expressed some doubts about the future of the bill.

"I think when bi-partisan negotiations break down, it makes the chance a lot less that we'll see a bill," said CFTC Commissioner Jill Sommers, a Republican.

On the derivatives part of the bill, she said she expects that the broader financial proposal by Sen. Dodd slated to be unveiled on Monday will largely contain the language from a bill he first circulated last fall. That bill was considered to be much stricter than the one that passed in the U.S. House because the regulatory exemptions from clearing and trade execution were narrower.

The language that Senate Banking members Jack Reed (D., R.I.) and Judd Gregg (R., N.H.) have worked on for derivatives, meanwhile, will likely be contemplated when the Senate Banking Committee sits down to vote on a bill, she said.

Sommers also said she expects what Reed and Gregg will propose will be very different than the version of the derivatives bill that will be released soon by the Senate Agriculture Committee.

Unlike the Senate Banking Committee, though, Sommers said there is "a lot of agreement on issues" at the Senate Agriculture Committee.

"I think you will see a bi-partisan bill in the agriculture committee," she said.