Financial Reform Bill: What Made the Cut
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
Let's start with the basics here: there hasn't been meaningful regulatory reform since the aftermath of the Great Depression. So perhaps it makes sense that after the Great Recession, lawmakers finally got on the stick and passed sweeping financial reform.
After hours of negotiations, the House and Senate conference committee managed to lock down the details early Friday morning. Both houses of Congress are expected to vote to approve the bill next week, so that President Obama can sign it before July 4.
Before we get into the details, however, let me state that this bill, while sweeping, historic and dense, doesn't do the one thing it set to accomplish: prevent the next financial melt-down. The reason is that it doesn't address the interconnectedness and size of financial institutions in a meaningful way. The watered down elements are a start, but they don't get us there. In the end, Congress wimped out, which may have something to do with the 2500 financial industry lobbyists that flooded DC during these negotiations.
So here's the cheat sheet of the bill's main contents:
Consumer Financial Protection/Fiduciary Duty
Yes Virginia, we got a consumer financial-protection bureau to oversee the mortgage market, credit card industry and even pay-day lenders! It will be housed in the Federal Reserve, though will have independent authority and rule-making ability to monitor financial institutions with more than $10 billion in assets. Bank regulators will continue examining consumer practices at smaller financial institutions.
Two bits of bad news for consumers: (1) Unbelievably, auto dealers are exempt-I guess the billions in taxpayer money wasn't enough for these guys! (2) Fiduciary Duty, or forcing brokers and agents to put their clients first and disclose all conflicts of interest, was scrapped. Instead, the SEC is required to study whether changes are necessary-who thinks that's going to happen after industry lobbyists get busy?
Credit and Debit Cards
The Federal Reserve will get authority to limit interchange, or "swipe" fees, that merchants pay for each debit-card transaction. The Fed will make sure that debit-swipe fees are "reasonable and proportional" to the cost of processing transactions. The provision will take effect a year after enactment.
The Volcker Rule
Named for former Federal Reserve Chairman Paul Volcker, the rule was originally intended to ban banks from risky trading. In the end, the language was massaged. Banks will be allowed to invest up to 3% if their Tier 1 capital in private-equity and hedge funds and will be limited to providing no more than 3% percent of the fund's total capital.
Resolution Authority
The bill gives the FDIC the power to unwind a failing financial firms, much in the same way that the agency manages the resolution of failed smaller banks. The financial industry itself (not taxpayers) will bear the cost of putting a firm to its death through fees imposed after a firm collapses.
Derivatives
Blanche Lincoln's original proposal to oversee the $615 trillion derivatives markets hit a wall at the end of negotiations. the compromise includes: banks will be able to maintain their trading operations that hedge risk or trade interest rate or foreign exchange swaps; most over-the-counter derivatives will go through third-party clearinghouses and onto regulated exchanges; banks will have 2 years to silo investments like credit default swaps into a separately capitalized subsidiary.
Businesses that use derivatives to hedge risk from producing or consuming commodities, deemed "end users," will be exempt from the clearing requirements if the activities were being undertaken as a way to hedge legitimate business risk.
Financial Stability Oversight Council
The bill will establish the Financial Stability Oversight Council, a super-regulator that will monitor and act to prevent systemic risks. The Treasury Department will lead the panel, which includes regulators from other agencies. Call me cynical, but when have regulators been able to spot systemic risk?
Bank Capital Rules
There are no hard capital requirements to limit the size of banks, but the bill does require some banks to have better quality capital on hand.
Credit Raters
Ratings companies got off easy under the bill. It will be hard for investors to sue credit raters and we'll have to wait for a 2-year SEC study to find out much more. For companies that were at the heart of the crisis, this punt seems lame and egregious.
Private Equity and Hedge Funds
Large hedge and private equity funds with more than $150 million in assets must register with the SEC, subjecting them to mandatory federal oversight for the first time. Venture capital funds are exempt.
Ratings Agencies:
Considering that these companies slapped "AAA" on lots of garbage during the bubble years, you'd think that they would have lots of new rules-WRONG! Raters got off easy, as lawmakers made it harder to sue them and pushed any reform on to the SEC, which will conduct a 2-year study...and then likely do nada!
Fannie Mae and Freddie Mac
Looking for something about these two behemoths? Well not in the bill. Congress seems to think that these entities didn't qualify for reform-the ultimate bad joke on all of us!
Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
