Dodd to meet with Bernanke, Paulson

by David Lightman

Sen. Christopher J. Dodd, chairman of the Senate Banking Committee, will take time out from his presidential campaign Tuesday to head back to Washington for a meeting with Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson.

The session, scheduled to begin at 10 a.m. in Dodd's Capitol Hill office, comes as markets nervously react to the recent credit crunch. The volatility was triggered by problems in the subprime mortgage market. Dodd has long thought the Fed could take some steps to improve its oversight of lenders and that Treasury could ease some regulatory requirements.

Dodd promised no fireworks Tuesday--but told CNBC this afternoon that in the past "I've been very disappointed" with the Fed's reaction to subprime lending problems. He said that recently, "things are improving here," but in the past the Fed "did not do its job, in my view, under existing authority of law to prohibit this kind of activity from occurring in the first place."

He has also been critical of the Bush administration, believing Paulson and the White House should push regulators to take strong steps to ease credit problems. Dodd has been urging regulators to allow Fannie Mae and Freddie Mac, government-sponsored agencies that try to keep mortgage markets healthy, to put more money into the system, but Treasury has resisted. Regulators want the agencies, which have been rocked in recent years by problems with their internal workings, to show more stability.

On the other hand, Dodd has been somewhat pleased by Bernanke's response to the crisis so far. When the chairman testified before the banking panel last month, he was grim but realistic about the prospects for quick improvement, telling the committee that losses from subprime mortgages could reach between $50 billion and $100 billion.

The Fed had taken some steps. In June, it held a hearing to discuss pre-payment penalties, the use of escrow accounts for taxes and insurance and other issues. More scrutiny is underway, with Bernanke telling the committee that the Fed would "address concerns about mortgage loan advertisements and solicitations that may be incomplete or misleading." He also pledged to make it easier to provide mortgage disclosures more quickly, "so that consumers can get the information they need when it is most useful to them."

There is some question, though, just how far Dodd and other members of Congress can push the Fed. The Fed is an independent agency and lawmakers know they are not supposed to go too far in pressuring the policymakers.

When the Fed Friday cut its discount rate, Dodd applauded the move, calling it a step in the right direction.

And, he said, "I'd certainly urge the Fed to be very vigilant in maintaining liquidity in these capital markets."

Today, the senator was cautiously optimistic.

He said the markets "look rather passive today," and called Wall Street's response to the Fed's moves last week "very positive."

The Fed this month has added $119 billion into the banking system, including an additional $3.5 billion Monday. However, it has not changed the target for its federal funds rate, which has been at 5.25 percent for more than a year.

Lowering that rate, the interest banks charge one another for overnight lending, is seen as the next Fed initiative, perhaps even before its next official meeting Sept. 18.

Dodd indicated he would not put strong pressure on Bernanke to act.

"The meeting I’m having with the Fed chairman tomorrow is one really just to be kept up to date, to have an good opportunity to talk to each other," he said. "I thought it’s a good time to sit down and meet and a candid conversation where things are headed."