May 20, 2010
Make no mistake about it: The Senate just handed Wall Street and the big banks their biggest political setback since the 1930s. For all the compromises and omissions, and all the money spent on industry lobbyists, the Senate bill would impose immense new restrictions that could end what has been a quarter-century of go-go growth and rising appetite for risk in financial firms of almost every type.
After overcoming Republican filibuster threats, the Senate voted 59 to 39 to pass the bill Thursday night.
The Senate bill would:
- Subject banks, credit card issuers and most other kinds of lenders to a new federal consumer-protection agency with the power to examine their operations and marching orders to rein in everything from high-risk mortgages to high-cost payday loans.
- Force the trillion-dollar market in financial derivatives – which aggravated the subprime mortgage boom and Wall Street’s subsequent near-collapse – onto regulated exchanges and clearinghouses.
- Give federal banking regulators new power to scrutinize and restrain giant financial institutions considered “too big to fail.”
- Transform incentives for credit-rating agencies, like Moody’s and Standard & Poor’s, which gave AAA ratings to trillions of dollars worth of bonds backed by reckless mortgages.
Consumer groups, often quick to complain that lawmakers are diluting real reform, declared victory even before the final vote. “This is the most significant reform for consumer financial protection and reining in the casino economy that we have had in fifty years,” exulted Heather Booth, executive director of Americans for Financial Reform, a broad coalition that includes Consumer Federation of America, major labor unions, liberal policy think-tanks and the nation’s biggest lobbying groups for the elderly.
Bulked Up, Not Watered Down
Industry lobbyists are stunned that the bill became tougher rather than weaker as it progressed through the Senate. "From the standpoint of the private sector, it's really a double whammy. It's an overlay of regulation which will have enormous compliance costs and new taxes to pay for it," said Dan Crowley, an attorney at K&L Gates in Washington who represents numerous financial firms.
Scott E. Talbott, a top lobbyist for the Financial Services Roundtable, which has adamantly fought against many provisions in the Senate bill, sounded almost shell-shocked by the bill’s breadth. "These are game-changing reforms to modernize the regulatory framework," said Talbott. "This bill will impact consumers, businesses, the entire financial services industry, and the U.S. and global economies. This bill leaves no aspect of the financial services sector untouched."
The bill is a major victory for President Obama and a valedictory for retiring Senate Banking Committee Chairman Christopher J. Dodd, D-Conn. Dodd was the guiding force who overcame strong opposition from many Republicans and some Democrats and skillfully navigated past numerous procedural barriers.
House and Senate lawmakers now must reconcile differences in their two bills and face a number of big fights. One is over a Republican proposal to exclude car dealers, who originate about 80 percent of all automobile loans, from regulation by the new consumer agency. A second big issue will be on a Democratic proposal that would immediately ban banks and Wall Street firms from “proprietary trading” – trading for their own accounts. Such trading has been one of the biggest sources of profits at firms like Goldman Sachs and JPMorgan Chase.
Debate Over Derivatives
There could also be a third big fight over a provision in the current bill that block banks from trading in financial derivatives, even if they are hedging their own risks, unless they do so through separately capitalized subsidiaries. Nevertheless, President Obama was ready to declare victory as soon as the Senate voted to cut off debate and end the prospect of a Republican filibuster.
Declaring that the Senate had taken a “major step forward,’’ Obama said Congress was about to usher in a new era of consumer protection and restraint on excessive risk-taking.
“The reform I sign will not stifle the power of the free market, it will simply bring predictable, responsible, sensible rules into the market place,” Obama said. “Unless your business model is based on bilking your customers and skirting the law, you have nothing to fear from this legislation. Our goal is not to punish the banks,’’ Obama added. “It is to protect the larger economy.”
When House and Senate negotiators sit down to work out a final bill, some of the differences will be significant, but both measures are broadly similar and consistent with the Obama administration’s proposal. Contrary to the assertions by Obama and many Democratic lawmakers, many experts caution that neither bill truly tackles one of the biggest underlying issues during the financial crisis: the existence of “too big to fail” financial institutions.
What both bills do is set up a “resolution” mechanism that would allow the federal government to take over failing giants and shut them down in an orderly manner. The hope is to prevent the need for more taxpayer-financed bailouts, in part by allowing federal officials to force concessions from a firm’s creditors as well as its shareholders. That process would be overseen by a new Financial Stability Oversight Council, chaired by the Treasury secretary and made up of representatives from the Federal Reserve and each of the federal financial regulatory agencies.
But even supporters of the legislation acknowledge that the federal government may have to put up big money to liquidate failing financial giants in the future. Under Dodd’s original proposal, big financial institutions would have been required to put up about $50 billion in advance. That proposal was dropped under pressure from industry. As amended, the Senate bill would instruct the Federal Deposit Insurance Corporation, which would carry out the liquidation, to borrow whatever money it needed from the Treasury.
Whether or not the plan prevents future bailouts, policy analysts say the bill would do little or nothing to reduce the number of institutions considered too big to fail. It does not, for example, impose any major new limits on the size of financial institutions.
Tell us what you think: Does the bill go too far or not far enough? Please comment below.
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