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Financial Reform Clears Senate After More Than Year of Wrangling

July 15, 2010 at 12:00 AM EDT
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After countless battles and revisions, the financial reform bill passed the Senate Thursday on near-party line votes, with the help of a few Republicans who broke ranks.
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JEFFREY BROWN: Now: A bill to overhaul the nation’s financial regulations cleared Congress today, after a struggle that lasted more than a year. It passed the Senate on a near-party-line vote, with a few key Republicans breaking ranks to support it.

Final passage came nearly two years after the meltdown of the country’s financial system.

MAN: The yeas are 60. The nays are 39. The conference report is agreed to.

JEFFREY BROWN: The way was cleared a few hours earlier, when supporters managed to muster the 60 votes needed to cut off debate.

Majority Leader Harry Reid said the bill would restore trust in the financial system.

SEN. HARRY REID, Majority Leader: When you go to any of the great casinos across Nevada and put your chips on the table, you’re gambling with your own money. If you win, you win, and, if you lose, you lose.

But Wall Street rigged the game. They put our money on the table. When they won, they won big. The jackpots they took home were in the billions. But, when they lost — and boy, did they lose big — they came crying to the taxpayers for help.

JEFFREY BROWN: Banking Committee Chair Christopher Dodd helped shepherd the bill through the Senate. He acknowledged, it’s not perfect.

SEN. CHRISTOPHER DODD, D-Conn.: I can’t legislate integrity. I can’t legislate wisdom. I can’t legislate passion or competency. What we can do is create the tools and the architecture that allow good people to do a good job on behalf of the American public. And that’s what a bill like this is designed to do.

I regret it can’t give you your job back, restore that foreclosed home, put retirement moneys back in your account. What I can do is to see to it that we never, ever again have to go through what this nation has been through.

JEFFREY BROWN: The bill is sweeping in its scope, running to some 2,300 pages. Among key provisions, it would give federal regulators authority to wind down troubled companies, in a bid to solve the problem of too big to fail. It would also create a 10-member oversight council to watch for threats to the broader financial system.

For the first time, there would be federal oversight of derivatives, those bets made on the future price of securities. And a consumer protection agency would be established within the Federal Reserve to regulate mortgages, credit cards and other products. All but three Republicans voted against the measure.

Minority Leader Mitch McConnell accused Democrats of a huge overreach.

SEN. MITCH MCCONNELL, Minority Leader: In other words, once again, the administration and its Democratic allies in Congress have taken a crisis and used it, rather than solving it. How else do you explain the fact that a bill that was meant to address the excesses on Wall Street is expected to hit individuals and industries that had nothing to do with the crisis it was meant to prevent?

JEFFREY BROWN: Other Republicans argued the bill would drive business and jobs to other countries and add to government bloat.

SEN. RICHARD SHELBY, R-Ala.: All the Democrats will succeed in doing, with the help of a few Republicans, is give the failed bureaucracies more power, more money, and a pat on the back, with the hope that they will do a better job next time. This is not real reform, Madam President. That is just more of the same.

JEFFREY BROWN: With the legislative battle over, regulatory agencies will now face the daunting task of writing and implementing what could be hundreds of new rules. First though, the measure goes to President Obama for his signature.

Late today, the president hailed passage of the legislation. He’s expected to sign it into law next week.

And we take a closer look at what it would do with two financial writers who have followed the bill on its long and winding road, Roben Farzad of “Bloomberg BusinessWeek” magazine, and Chrystia Freeland, global editor at large for Reuters.

Well, Roben, to help us remind us what is here, if you had to pick out one or two key things this does, what would those be?

ROBEN FARZAD, senior writer, “Bloomberg BusinessWeek”: You mean we don’t have time to go through the 2,300 pages, Jeff?

(LAUGHTER)

JEFFREY BROWN: No, we don’t. So, give me a couple.

(CROSSTALK)

(LAUGHTER)

ROBEN FARZAD: What’s huge here is giving the Federal Reserve, I think, ultimate oversight.

You know, when it doubt, the regulation goes to the Federal Reserve. I think the 10-member systemic risk council is huge, in that for the first time you actually have government being able to say that we are out there being able to identify systemic risk. And, in theory and hopefully in practice, they could take apart a firm that endangers the entire system.

JEFFREY BROWN: Now, Chrystia Freeland, of course a key question was what this does to change the behavior of Wall Street.

And what do you see in terms of imposing change, and where might it fall short? What do you see?

CHRYSTIA FREELAND, Reuters: Well, I agree with Roben that those are some of the key points.

The other points that I would really single out are, as your report mentioned, I think the derivatives rulings are really, really important, the fact that derivatives, now most of them have to be exchange-traded and they have to be centrally cleared.

This was the part of the market that really blew up. And what was so scary about it, with hindsight, was, people really didn’t know what was going on there. That is what we refer to when we talk about the shadow banking industry.

So, it’s really important that most of these derivatives now have to be centrally cleared — that means we will all know about it — and exchange-traded.

In terms of where the bill falls short, I would say they should have gone further on the derivatives. You can still — if are you a non-financial party, if you are, say, an oil company, you can still trade in derivatives not on the central exchange. I think that that’s a mistake. I think it would be better to move them all on to the exchanges.

JEFFREY BROWN: Roben, bring us to Main Street now. What is the impact on average people, on consumers, specifically through this new consumer protection agency?

ROBEN FARZAD: Well, there is a rather massive codification of very specific consumer protections here.

I mean, everywhere from credit card customers to investors, you’re now specifying that the SEC can come out and say that brokers have to espouse a fiduciary interest, where they put the — the clients’ interests ahead of theirs. Amazingly, I mean, a lot of us don’t realize that that actually wasn’t law before. That’s an option that broker-dealers have.

And then, in terms of specificity a lot of things now, the devil is in the details in terms of what mortgage companies, loan companies, credit card companies can and can’t do in terms of nickel-and-diming you, the warning they have to give, the impossibility now of issuing some of the liar loans that took down the entire mortgage system.

So, really, regulators used this opportunity to kind of roll up their sleeves, and not just kind of rein in Wall Street and cordon off systemic risk there, but go after a lot of the practices that affect bread-and-butter Americans.

JEFFREY BROWN: Of course, Chrystia, some of the bankers involved here, they — they argue that the new regulations could impact mortgages. They could curtail lending. What do we know about what will happen?

(CROSSTALK)

CHRYSTIA FREELAND: Well, if they work, then they should curtail lending.

JEFFREY BROWN: That’s part of the issue, right?

CHRYSTIA FREELAND: Part — yes, that’s part of the issue.

And I do think that people, the American public has to be honest about this. Part of the purpose of this financial regulation is, if you want to use a traffic metaphor, what we have discovered in hindsight is that capital was moving too fast. The speed limits were too high, and there weren’t enough air bags, and there weren’t enough seat belts in the system.

The goal, broadly speaking, of this legislation is to lower the speed limit of financial capital and to require all of us to wear seat belts. Now, the good news is, I think the legislation succeeds in doing that, maybe not 100 percent, but to some extent. And that should mean that car crashes, you know, 100 car crashes are a little bit less likely in the future.

But what it also means is that capital is going to move a little more slowly. That is the inevitable cost. And for Main Street, that means, yes, it will be harder to get a mortgage than it was in the go-go years of 2006, 2007.

Inevitably, we are going to be writing stories, you are going to be do reports about poor American homeowners who are no longer able to get a mortgage. Well, guess what? That’s the price of having a safer financial system.

JEFFREY BROWN: Now, Roben…

(CROSSTALK)

ROBEN FARZAD: And may I chip-shot off…

JEFFREY BROWN: Yes, go ahead.

ROBEN FARZAD: … off Chrystia’s point, actually? I mean, you want to talk about speed limits here, oftentimes, time and again, Wall Street has shown that it doesn’t want to drive 65. A lot of this money is going to go offshore.

It’s going to reconstitute in other esoteric vehicles, much the same way we saw private equity and leveraged buyout boom after Sarbanes-Oxley, the last huge show of re-regulation that we had in the early part of last decade.

I think it’s very important to notice that. And this money, I mean, there’s still lots of restive capital out there that is going to look for yield. I don’t think the securitization market is going to die. These people — like I have said before, Wall Street gets paid a lot to learn how to game the system.

If it has to move money abroad, so be it. If it has to use special purpose entities, so be it. And that’s the prediction that a lot of people are making today.

JEFFREY BROWN: Well, so, Chrystia, in terms of who watches, going forward, to make sure that those kind of things don’t happen or untoward things don’t happen, what does the bill bring in terms of regulatory changes. The Fed still has — actually, the Fed maintains a lot of power. And Roben referred to that new council, the oversight council.

CHRYSTIA FREELAND: Yes, exactly.

I mean, that is a new thing. And it is really important that there now is a council that has overall authority. I think the issues there are, first of all, it is still a very feudal, a very Byzantine regulatory system. If you were being radical, you could have really shaken up this very fractured, you know, very multigroup group of regulators and said we want to have more unity. We want to have a single regulator. We want to make it easier to oversee the system and harder for these banks to engage in regulatory arbitrage.

So, it is a tough game for the regulator. And the second really important point, which your report highlighted, is so much of this is going to be about the judgment of the regulators. And I think, when we look back at the financial crisis of 2008, one of the conclusions we’re going to draw is, regulators forgot that their job was to be policemen. And they started to see themselves as farmers, if you were, of Wall Street.

They started to think that their job was to help financial services to grow. Now, that might be the job of other parts of government, but, surely, the job of regulators is to make sure these guys are not doing things which are too risky.

And what will really determine whether we have another big financial crisis in the next five years or 10 years is going to be what attitude the regulators take.

JEFFREY BROWN: Now, Roben, just in our last minute or so, I do want to ask you about this other story that broke today, because it is related. That’s Goldman Sachs agreeing to pay $550 million to settle those civil fraud charges with the SEC.

What — how important is that in the larger scheme of what we are talking about?

ROBEN FARZAD: Yes, what are the chances that these two headlines hit the tape within hours of one another?

I think you make a very important point. This is — this was related. The SEC kind of pursued its action, a lot us are arguing, to kind of put the fear of God into these Wall Street firms that it was serious, that it was going to go after the most successful and profitable firm.

You can look at this two ways. The SEC is kind of billing this as, look, we are extracting our biggest ever penalty out of a firm. Goldman is going to behave itself. It’s going to say that it’s not going to kind of pursue these (INAUDIBLE) practices going forward.

And, obviously, the Obama administration can run victory laps around this, I mean, the Rose Garden signing coming up of this huge re-regulation package and the Goldman Sachs censuring. But, on the other hand, it is just a $550 million fine. And you compare that to the tens of billions of dollars that Goldman and its ilk made during the subprime bubble, and you wonder if it was enough.

JEFFREY BROWN: Chrystia, we have got time for your analysis, short analysis, on this one. They didn’t admit to wrongdoing, but they did say they going to reform their practices.

CHRYSTIA FREELAND: Well, first of all, I do love the fact that, for Roben, $550 million, more than half-a-billion dollars, is not very much money. For me, it’s a lot.

(LAUGHTER)

JEFFREY BROWN: He lives at a very high level, Roben does.

CHRYSTIA FREELAND: There you go. There you go.

No, I think that this is important. I would say the timing actually is really unfortunate, because, hard as it may be for Main Street America to believe, but Wall Street right now feels incredibly aggrieved. Even some of the guys who were writing really big checks for Obama in 2008 now feel that D.C. hates them and that there is a conspiracy in government against them.

The fact that this ruling comes on the day that financial regulation passes is really quite unfortunate. To me, the big question in terms of the SEC is going to be, is this it? Or is the Goldman case just going to turn out to be the beginning of a really aggressive sort of settling of scores for 2007, 2008? And I think that’s the big question that Wall Street will be asking as well.

JEFFREY BROWN: All right, Chrystia Freeland and Roben Farzad, thank you both very much.

ROBEN FARZAD: Thank you, Jeff.

CHRYSTIA FREELAND: Pleasure.