Election News 2008

In the Democratic primaries earlier this year, they were rivals. But as President-elect Barack Obama begins work crafting what will have to be among his first initiatives -- a new regulatory framework for financial services -- he will do so with Senate Banking Committee Chairman Chris Dodd as a linchpin to the plan's success or failure.

Quashing speculation he was eyeing the Foreign Relations Committee gavel being given up by Vice President-elect Joseph Biden, Dodd announced Nov. 6 that he would remain at the helm of the panel he has chaired the past two years, the Senate's primary body for banking, insurance, securities and housing issues. Moreover, the senior Connecticut Democrat made clear in a press briefing that regulatory modernization -- including, potentially, a single regulator for all financial services -- would be the first item on the agenda in 2009.

"If we're going to regain the confidence of investors and consumers and businesses here at home and around the world, then we must undertake comprehensive reform," Dodd told reporters. "We need to ensure that all institutions that pose a risk to our financial system and taxpayers are carefully and sensibly supervised. This responsibility could reside with a single regulator, or with multiple agencies. I haven't made up my mind about that, nor have members of the committee, and there are other options as well."

Those options will be laid out before a new Congress that will see Democrats add to their majorities in both chambers. In the Senate, the party will control at least 57 seats, having defeated Republican incumbents in North Carolina, New Hampshire and Oregon and seized open seats formerly held by the GOP in Virginia, New Mexico and Colorado. Races in Alaska and Minnesota remain undecided, while in Georgia, incumbent Republican Saxby Chambliss will face a December run-off against Democrat Jim Martin.

In the House -- where Financial Services Committee Chairman Barney Frank, D-Mass., has expressed interest in appointing a select committee to deal with regulatory reform, with members coming from his own panel as well as the Commerce, Ways and Means and Agriculture com-mittees -- Democrats have picked up at least 18 seats. Eight other races remain too close to call, and could, if they break the party's way, bring the Democratic majority to a dominating 262 to 173.

"The fact that the Democrats may get real close to a cloture majority in the Senate changes things a little bit, because you don't get that break on policy that you would otherwise have, and that was a pre-constitutional process the Senate had to keep from having these radical overreactions," said Ben McKay, senior vice president for federal affairs at the Property Casualty Insurers Association of America.

Among the "overreactions" most feared in the insurance industry is a new federal regulatory apparatus that adds to the burdens already seen at the state level, without reducing either the complexity or the paperwork required to operate in the bifurcated 50-state system. While optional federal charter has divided the industry for years, the potential of a mandatory, two-tiered regulatory system is showing signs of unifying the industry's forces.

"I have been sort of a lone voice in the woods for the last four-to-six years, saying 'be careful what you wish for,' because I don't think it will be optional," said Robert Rusbuldt, president and chief executive officer of the Independent Insurance Agents & Brokers of America. "Not necessarily a day-to-day regulator, but they will have federal power to trump a state insurance regulator if they see the need to do that."

Rusbuldt suggested the expansive powers that could be wielded by a "systemic risk" regulator would likely to render moot the more limited Insurance Information Act sponsored by Capital Markets and Insurance Subcommittee Chairman Paul Kanjorski, D-Pa., who narrowly survived one of relatively few significant Election Day challenges to a sitting Democrat. But with the issue of disclosure and regulation of credit default swaps still on the table, and given their role in the troubles faced in the financial guaranty sector and in the downfall of American International Group, new federal reporting requirements almost certainly will be coming to the industry.

"We need more transparency in the financial system, much more," said Dodd. "We cannot afford to have trillion-dollar markets where there is limited information about who owns or owes what, and we cannot have regulators in the dark about the risks posed by and to the institutions under their watch."

On that point, even the industry itself is likely to agree, McKay suggested.

"Companies are so complex now. They're doing so many different things, writing so many different products, that you really can't do a market assessment of risk without looking at insurance companies," McKay said.

-- R.J. Lehmann