May 21, 2010 - The Senate's passage of this legislation would bring about the biggest financial system overhaul since the 1930s.
Nearly two years after the risky behavior of big banks sent the U.S. economy into near-collapse, Congress has passed financial reform legislation said to be the most extensive since the Great Depression.
Against strong Republican opposition, the Senate passed its version of the financial reform bill late Thursday night by a vote of 59 to 39.
Experts say that the majority of regulatory changes needed to prevent a future economic collapse are in the Senate legislation.
The bill meets the goal of making it "a whole lot less likely that we could have big financial institutions requiring bailouts," said Lawrence White, an economist at New York University who has worked for both Republican and Democratic administrations. "That's the freight train that is now clearly pulling out of the station," he said.
The House passed its version of the reform bill in December 2009, and now legislators will meet in a conference committee to reconcile the two versions.
"It is hard for me to think that this is going to take us more than a month," said U.S. Rep. Barney Frank after he and Sen. Chris Dodd met with President Obama today.
Picture: U.S. Senator Christopher Dodd (Right) and Rep. Barney Frank (Left)
Democrats hope to have a final bill on the president's desk by the Fourth of July holiday.
Over a month ago, Obama urged Congress to pass the reform package.
"If there's one lesson that we've learned, it's that an unfettered market where people take huge risks and expect taxpayers to bail them out when things go sour is simply not acceptable," he said on April 14th.
The version passed by the Senate comes close to meeting the president's goals -- tightening rules on credit and securities markets, boosting requirements for banks' cash reserves, and creating a new watchdog agency to monitor consumer financial products like mortgages.
That agency will watch out for things like hidden fees from credit card companies and risky mortgages handed out by predatory lenders. "The agency will ask, 'Are consumers being tricked and cheated?'" said White. "It's there that you are going to see the agency take action."
The consumer agency will likely not regulate many fees, including ATM fees. Those were a high-profile part of the debate over the bill, particularly after one senator, Democrat Ben Nelson of Nebraska, claimed he had never used an ATM, which quickly made him the butt of jokes.
The bill also lays out protocols for federal regulators to shut down financial firms that pose a threat to the wider economy, though it does not include a proposed $50 billion liquidation fund, funded by big banks, to cover possible collapses.
Though the legislation will likely curtail profitability of the banks significantly, the bill's restrictions were not as harsh as investors had initially expected, and on Wall Street, bank stocks were up today on the news of the passage.
Some activists say the bill is a solid step toward improving regulation but doesn't go far enough.
"It does include some very important, very promising and hopeful measures, but it should be much stronger," said Robert Weissman, president of Public Citizen, the consumer advocacy organization.
Of particular concern to Weissman and others is that the bill does not solve the problem of financial institutions that are "too big to fail," like AIG, which taxpayers had to bail out at a cost of $200 billion.
"We had a direct chance to deal with this most central problem ... a far-too-large financial industry that's dominated by a handful of goliath institutions," said Weissman. "And the Senate chose not to take the proper action on behalf of the public and to instead side with the Wall Street firms and the giant banks."
Weissman and others have also criticized the legislation for failing to shore up restrictions on derivatives. While the Senate bill creates new rules for derivatives, like requiring that deals be made on a public exchange, it does not provide an enforcement mechanism, which legislators say will be fixed by the conference committee.
Still, experts say the new derivatives rules are a big improvement.
"It's going to bring a lot more sunshine, a lot more daylight to derivatives," said White.
So, in summary, the key elements of the Senate bill include:
• Establish a new council of "systemic risk" regulators to monitor "too big to fail" firms and prevent bubbles from forming.
• Create a new consumer protection division within the Federal Reserve.
• Empower the Federal Reserve to supervise the largest, most complex financial companies.
• Resolution authority for the government to seize and liquidate failing financial firms without a taxpayer-funded bailouts.
• Give regulators new powers to oversee derivatives.
• Force banks to stop "proprietary trading," or making market bets with their own capital, and put limits on firms' ability to grow beyond a certain size of liabilities.
The WSJ labeled the Senate bill (which must be reconciled with a House version) "harder than expected" and said Wall Street is "bracing for seismic changes."
Considering prop trading and derivatives have become huge sources of income for Wall Street firms, maybe "certainty" over reg reform isn't such good news, after all.
No tears are being shed for the "fat cats," but if the reforms result in a contraction of credit, as opponents contend, the U.S. economy and our 401(k)s will feel the impact.
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