Believe it or not, it has been almost three years since the financial system first began to crack apart under the strain of reckless mortgages and Wall Street buccaneering.
On Thursday, after a year-long battle and repeated brushes with failure, Congress finally passed a sweeping overhaul of financial regulation aimed aims at preventing a similar meltdown from ever happening again.
Final passage of the bill ended more than a year of wrangling over the shape of the landmark legislation. The 60-39 vote in the Senate came only a few hours after Democrats cleared a final procedural hurdle by securing enough votes to break a GOP filibuster. The bill now goes to the White House for Obama's signature.
Will it cure what ails us? No one knows. Will it cripple capitalism? Probably not. Will it transform the banking system? Absolutely. “This will be an entirely new paradigm,’’ says Karen Shaw Petrou, co-founder of Federal Financial Analytics in Washington and a veteran analyst of financial regulation.
What’s more, the changes will be coming fast. White House and Treasury officials are already recruiting people for a powerful new Bureau of Consumer Financial Protection. The Federal Reserve is working on a slew of new rules for the biggest banks.
Gary Gensler, chairman of the Commodity Futures Trading Commission, told a conference of financial executives in New York on Thursday that he has already assigned 30 teams to start working on new rules for the vast and largely unregulated market in financial derivatives.
"Both the commission and the staff look forward to hitting the ground running," Gensler told the conference.
At more than 2,300 pages, the bill is immensely complicated and tries to accomplish an incredible range of goals. But the bill leaves hundreds of difficult decisions up to regulators, and financial firms are gearing up for a whole new wave of battles.
- The new Bureau of Consumer Financial Protection has power to regulate and examine mortgage lenders, banks, credit card companies, payday lenders and many others. But the actual rules could be anywhere from rigid to lax.
- A new Financial Stability Oversight Council, led by the Treasury secretary, will monitor risks across the system and propose tough new restrictions. The Federal Reserve has marching orders impose much higher capital requirements on the nation’s biggest financial firms.
- To prevent future bailouts, the government will have the power to seize troubled firms that are considered “too big to fail” and shut them down in an orderly way.
- The trillion-dollar market for exotic financial derivatives, which has been mostly unregulated, will be turned almost upside down.
The Chamber of Commerce, which bitterly opposed the financial reform bill, estimates that the new law calls for 553 rulemakings and studies. Petrou, of Federal Financial Analytics, predicts that the new law poses a huge threat to the entire business model for giant bank-holding companies like JP Morgan Chase and Goldman Sachs.
At a minimum, the new law requires the Federal Reserve to design a whole new set of capital requirements and risk-management rules for “systemically important’’ financial institutions – those with more than $50 billion in assets. Those capital requirements are already the subject of furious negotiations among bank regulators from around the world, including the United States. The new rules are supposed to be completed by the end of this year, though regulators plan to give banks at least several years to prepare.
Meanwhile, work will be heating up on scores of other big provisions of the law. The so-called Volcker Rule is designed to prohibit banks from proprietary trading, which has been a huge source of profits for many of the biggest players. But the law leaves the actual decisions up to regulators.
Likewise, the law puts limits on the ability of banks to trade derivatives. The original version of that provision would have forced banks to spin off their swap trading to separately-capitalized subsidiaries. But the final version is considerably softer, and the ultimate rules almost impossible to predict.
Wall Street executives and big bankers, who lobbied furiously against many of the restrictions, are furious with what they see as ham-handed restrictions that will make it harder for everybody to get the financing they need. But Neal Wolin, Deputy Secretary of the Treasury, appearing today at the same financial conference as Gary Gensler, said that history provides a more comforting perspective.
In 1934, Wolin said, the president of the Chamber of Commerce warned that the landmark Securities Exchange Act would have “disastrous consequences” for the stock market, “destroy the liquidity of banks” and “impose on corporations of the country serious handicaps in the practical operation of their business." Today, Wolin said drily, “it seems safe to say that was overblown.”
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