TOPICS > Economy

Banks, Regulators Battle Over Scope of New Financial Reform Law

November 23, 2010 at 6:00 PM EDT
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Judy Woodruff looks at how banks and regulators are grappling over how to enact the new financial reform law. Deborah Solomon of The Wall Street Journal has more details on how the new regulations are taking shape.

JUDY WOODRUFF: And to the latest on the battle to shape the scope and impact of the new financial reform law.

Last July, the president signed sweeping financial reform into law, hailing it as the strongest package of consumer financial protections in history.

The act gives federal regulators authority to downsize troubled companies, in a bid to solve the problem of too big to fail, establishes federal oversight of derivatives, those bets made on the future price of securities, implements the so-called Volcker rule, designed to force big banks to limit using their own money for speculative deals on their own behalf, sets up a consumer protection agency within the Federal Reserve to regulate mortgages, credit cards and other products, and creates a 10-member oversight council to watch for threats to the broader financial system.

That council of regulators, headed by Treasury Secretary Timothy Geithner, met for a second time today.

TIMOTHY GEITHNER, U.S. Treasury Secretary: The members of this council have made a lot of progress in moving quickly to begin the process of rule-writing and to bring more clarity and certainty to our financial markets.

JUDY WOODRUFF: Among the topics addressed: an internal review of problems in the mortgage industry and how regulators should go about designating institutions or financial market utilities as too big to fail.

TIMOTHY GEITHNER: Imposing higher, more consistent standards on the financial market utilities is a centerpiece, is a key piece of building a more resilient, more robust financial system.

And one of the critical responsibilities of this council is to take the first step towards that by designating systemically important financial market utilities.

JUDY WOODRUFF: One item of the law they didn’t address today was the Volcker rule. It’s one of many provisions of the law that the council and regulators still have to fully flesh out.

For their part, banks and other financial institutions are vigorously lobbying regulators behind the scenes. The council is scheduled to issue some prescriptions when they meet again next January.

And for more on how the banks and regulators are approaching the law, we turn to Deborah Solomon, who’s been following this for The Wall Street Journal. It’s good to have you with us.

DEBORAH SOLOMON, The Wall Street Journal: Thank you.

JUDY WOODRUFF: I think most people would be surprised, Deborah, to know that, once a law is passed, that’s not the end of it, that there’s still shaping going on. Explain to us what’s at stake in all of this.

DEBORAH SOLOMON: Well, it’s interesting. I mean, the law was passed with a lot of fanfare, but it left so many details up to the regulators, to the SEC, the CFTC, the Fed, you know, a whole smorgasbord of agencies, that basically now have to come up with definitions and interpret the law, because the law just sort of set out a broad framework.

And there’s a lot at stake for the banks and other financial institutions that aren’t banks, everything from how much capital they’re going to have to hold in reserve in case there’s a worsening of the economy, to the kind of trading they can do if they are a financial institution, to the types of credit card products they can offer.

So there’s a whole range of definitions and rules that have to be spelled out over the next few years.

JUDY WOODRUFF: Is there any part of the law that’s firm now that these institutions know they have to start changing the way they do business to accommodate?

DEBORAH SOLOMON: Well, there are a couple things.

I mean, they know sort of the intent of the law, which is to limit risk-taking by institutions. So, they’re doing a couple things. One is they’re starting to get more capital, so they’re trying to build their capital reserves to make sure that, if there is some sort of problem in the future, they can withstand the losses, they can absorb the losses.

I mean, one of the problems we saw in the financial crisis was that banks, basically, they weren’t insolvent, but they didn’t have the money to deal with all of the losses that were on their books, which is why they had to take government money, you know, taxpayer bailouts. So they’re starting to build up their capital reserves as a part of global capital regulations that have been agreed upon.

Then they’re also trying to deal with the Volcker rule, which, strangely enough, hasn’t been written, but a lot of banks say they are compliant with it, which is interesting, because how can you be compliant with something that isn’t actually in effect yet?

JUDY WOODRUFF: Well, explain how that is, because that is still being shaped, formed. So, what’s going on?

DEBORAH SOLOMON: Right. Well, and, actually, there’s a very long lag time between when they have to comply. I mean the earliest they will have to comply is three years and potentially as long as six years.

Essentially, what they’re doing is trying to limit risk-taking. So, some banks, like Morgan Stanley, have sort of wrapped the industry and said, look, the lesson we should learn from the financial crisis is that we shouldn’t take risks with a firm’s capital if it potentially puts the entire firm at risk.

So, they are sort of, you know, morphing out of the — quote, unquote — “proprietary trading,” which is essentially using the firm’s own capital to make bets, to make a profit. Other firms, like Goldman Sachs, are selling their proprietary trading business. J.P. Morgan has sort of walled theirs off.

But a lot is sort of the devil is in the details. And we don’t know exactly how these things are going to work in the future. There are some folks say, well, Wall Street is going to find a way to make money and to make profits, and so they will call it something else.

JUDY WOODRUFF: No matter what.

DEBORAH SOLOMON: Right. They won’t call it proprietary trading. They will do something else. And it’s totally up to the regulators to define how strict they need to interpret this Volcker rule.

JUDY WOODRUFF: So, tell us, how are the banks, the financial institutions trying to shape this? What are they doing? What arguments are they making? Are they taking people out to lunch? I mean, how does this work?

DEBORAH SOLOMON: Well, I don’t think they’re taking anybody out to lunch.


But the regulators so far have begun posting lists of meetings that they have had. And the lobbyists for the banks and for, you know, some of the other non-financial, non-bank institutions have been in, in force to the Fed, to the FDIC, to the FEC, to the CFTC.

And you can sort of see they’re all making the argument, make sure you interpret the Volcker rule narrowly. You know, you could hurt capitalism if you interpret it too broadly or make the rules too prescriptive on things like designating non-bank companies as systemic, which essentially brings them under this whole new regulatory umbrella. They’re all saying, not me. You know, we’re not systemic. It’s the other guy.

So, they are lobbying aggressively to sort of limit the reach of the law and to make it as, you know, palatable as possible, although, when you talk to the banks, they realize, we have to live in the new regime. I mean, things are not going to be the way they were, you know, pre-crisis. But they want to limit the impact as much as they can.

JUDY WOODRUFF: And remind us who finally makes these decisions on what the rules are.

DEBORAH SOLOMON: Well, I mean, it does fall to regulators jointly, which is one of the strange things about this law, is that, you know, imagine one agency trying to do this. You know, they have boards that have political appointees. Now you’re talking about seven or eight agencies that are trying to do this together.

The Treasury Department sort of has this council that oversees the regulators, and it tries to foster cooperation and coordination. But it’s going to take a long time and a lot of cooperation to try and get, you know, various agencies with different interests who all want to retain power to agree on rules that are really, really important.

JUDY WOODRUFF: Well, I’m going to take you in a slightly different direction, because you mentioned the regulators. And, of course, the big one is the Federal Reserve.

And, today, they issued a more pessimistic report on what they expect the economy is going to do over the next few years. They said growth is not going to be what they had thought it was going to be just a few months ago. What’s the significance of that?

DEBORAH SOLOMON: Well, I mean, the significance is that we’re in for a long slog. The unemployment rate is going to stay higher for longer than they would like. Inflation is lower than they would like.

And we’re seeing lower growth, which isn’t going to pull us out of this as quickly. I mean, they’re going to — they say the economy is going to grow about 3 percent down from about 3.5 percent for their projections. And what it means is that they’re going to try and do more to stimulate the economy, which is one of the reasons you saw the action announced a couple of weeks ago about pumping more money into the economy, buying the $600 million worth of treasury securities, which is essentially just the Fed printing money to try and boost the economy and stimulate things to get moving again.

JUDY WOODRUFF: So does that in some way provide greater justification for what they did, or…

DEBORAH SOLOMON: Well, it does, but there is dissension within the Fed. And that’s become more apparent in the last — in minutes in the last couple of weeks, that not everybody is in agreement that what they’re doing is good.

There are some people who say, this is a natural, slow recovery. We had a horrible recession. It was so deep and so profound, that it’s going to take a while to get out of it, and that, if you do things like pump money into the economy right now, you run the risk of creating another bubble, of creating too high inflation and of also driving down the value of the dollar.

JUDY WOODRUFF: And that’s a debate we will continue to watch, and the arguments. Deborah Solomon with The Wall Street Journal, thanks very much.