JEFFREY BROWN: It took all night, but key members of Congress completed a compromise bill to rewrite financial regulations. The move sends the measure to the full House and Senate for final action.
MAN: Yes, I will be very brief. I know it's late.
JEFFREY BROWN: As many Americans were waking up this morning, congressional negotiators were putting the finishing touches on reforms intended to prevent a future financial meltdown.
U.S. PRESIDENT BARACK OBAMA welcomed the progress before departing for this weekend's G20 summit in Canada.
BARACK OBAMA, president of the United States: We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression.
Early this morning the House and Senate reached an agreement on a set of Wall Street reforms that represents 90 percent of what I proposed when I took up this fight.
JEFFREY BROWN: The deal came at the end of marathon session on Capitol Hill lasting more than 21 hours.
REP. BARNEY FRANK, D-Mass.: Financial Services Committee Chairman: I declare the bill passed and, the conference committee is now adjourned.
JEFFREY BROWN: The compromise bill reached between House and Senate lawmakers would establish a Consumer Protection Agency within the Federal Reserve to regulate financial products like mortgages and credit cards, attempt to address the problem of too big to fail by giving federal regulators authority to wind down troubled companies, and create a 10-member financial services oversight council, including the treasury secretary and Fed chairman, to watch out for threats to the system and enforce tougher regulations.
Two of the more controversial provisions that passed were softened during the final hours of debate. For the first time, there would be federal oversight of derivatives, bets made on the future price of securities. Banks would have to spin off trades of their riskiest derivatives like the ones that brought AIG down, and they would be recorded on regulated exchanges.
But other lucrative transactions related to interest rates, foreign exchanges, and gold and silver would be exempt. Lawmakers also approved the so-called Volcker rule aimed at restricting banks from trading for their own benefit on financial markets.
House and Senate lawmakers hope to approve the bill before leaving for the July 4 recess, but, after a near party-line vote, Democratic leaders will need some Republican support.
In an interview today with PBS' "Nightly Business Report," House Financial Services Chair Barney Frank acknowledged compromises were made to ensure the bill's passage.
REP. BARNEY FRANK: We have the votes in the House, I believe. In the Senate, Senator Dodd and I were both constrained by the need to get to 60. So I think we're on track to do both.
JEFFREY BROWN: The president also expressed optimism about the bill's chances. Asked by reporters whether financial reform would have 60 votes in the Senate, he replied, "You bet."
And for more on what the new rules would and perhaps would not change, we turn to Nomi Prins, a former managing director at Goldman Sachs. She's author of "It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street." She's a senior fellow at Demos, a public policy research and advocacy organization. And Douglas Elliot spent 20 years as an investment banker, mostly at J.P. Morgan. He's now a fellow at the Brookings Institution.
DOUGLAS ELLIOTT, I will start with you. And before we get to particulars, what do you see when you put it all together? Major change?
DOUGLAS ELLIOTT, fellow, Brookings Institution: It's absolutely a major change.
As stated, it's the biggest set of changes since the Great Depression in this area. And I'm quite happy overall. In the real world, getting to maybe two-thirds of where we really should be, which is what I think we did, is a good thing.
JEFFREY BROWN: Nomi Prins, same question: overview. What do you see?
NOMI PRINS, former managing director, Goldman Sachs: Well, I agree it's certainly a large bill with a lot of context in it, but I don't think it fundamentally changes the nature of how Wall Street operates, the structure of the banking system, or effectively can mitigate the type of immense risk that still exists in the system today, that is still part of the makeup of how trading vs. doing more plain vanilla business for customers with deposits and lending actually operates.
JEFFREY BROWN: All right, well, let's walk through a couple of these things.
DOUGLAS ELLIOTT, would how this help avoid the instability in the system, avoid another meltdown? What specifically is there?
DOUGLAS ELLIOTT: Well, I think there are quite a lot of things.
And one thing that is sometimes lost when we talk about the bill is, it's a very broad bill. There may be 15 important things in here, even though we tend to concentrate on a small number. But to give you a few examples, there's going to be a Consumer Protection Agency, which I think will make it less -- much less likely that we would have the kind of abusive mortgages that became so prevalent and helped lead to the bubble and then the crisis.
You also have derivatives, as mentioned, are going to be traded to a much greater extent on exchanges, where there will be less of the so-called counterparty risk that created problems with AIG and where it's much more transparent what's being done and who's holding what risks.
And you can go on and on from there. There are a lot of things that work together.
JEFFREY BROWN: All right, let's pick on a couple of those, Nomi Prins. First, the -- well, I will start with the Consumer Protection Agency. What does that do or perhaps not do for all of us?
NOMI PRINS: Well, I agree. I think it's an important agency to have. I would prefer it to have been an independent agency, rather than at the Federal Reserve.
But I think it will depend also upon who runs the agency and how much enforcement power they have and what they're able to look at and what they're able to actually get done.
I think it's very important for consumers, for citizens of this country, to have a separate fighting agency that will take a look at the types of predatory loans, of difficult, complex documentation that went into some of these loans and everything else. And I think that's important.
I think what I hope it will do and what it doesn't currently do or isn't set up to do is take a look at some of the toxic assets that we ultimately came to know that were created from the back of these loans, because those were really a bigger part of what became the meltdown than the loans themselves.
So, I think they can do a lot for consumers, but I hope they can also expand to do more for the assets themselves that are created from the loans.
JEFFREY BROWN: And, Nomi...
NOMI PRINS: In terms of derivatives...
JEFFREY BROWN: Yes, go ahead with derivatives. That's what I wanted to ask you about.
NOMI PRINS: In terms of derivatives, and it ties into a little bit some of these assets, which -- many of which were very complex sets of securities and derivatives and a lot of things mixed up, and the way the bill has currently been reconciled is that those types of assets would be in a subsidiary, away from the main sort of books of the bank, but still under the umbrella of the bank holding company.
So, they would be a part of the institution. If they don't -- if that happens, if there are complex assets or derivatives that are in a subsidiary from the institution, and they are better capitalized, that could work for a while. But to the extent that they also include a lot of risks that we don't even know about yet, they could also be a problem, because they're still within the bank.
They're not separated from the dealings of the bank. So, it's one thing to say they will be aside and they will be capitalized. But at the end of the day, if a bank is failing because its side bets aren't working, and there isn't enough capital, because derivatives are leveraged securities, it can still be very hurtful to the overall institution, because they're not being segmented out completely, derivatives trading from the general deposits and lending that a bank is currently able to do in a bank holding company structure.
JEFFREY BROWN: Well, that leads to, Douglas Elliott, this question of the ability to unwind institutions when they do get into trouble, a major problem last go-around. What do you see here that -- that -- a structure that would prevent that?
DOUGLAS ELLIOTT: Well, this was definitely a big step forward, because, for many years, we have had the ability for the federal regulators to deal effectively with a large bank that got into trouble, but not with a non-bank.
And that includes investment banks, like Bear Stearns or Lehman. It included insurance companies like AIG. So, what will be the case going forward is, if the regulators see an organization that's important to the financial system which is a non-bank, they can step in and do many of the same things they're allowed to do with banks.
I think that will be quite helpful should we run into this kind of crisis again.
JEFFREY BROWN: And just staying with you, of course, for the past few years, we have all -- a lot of attention on the regulators themselves, the regulatory structure. Has that been dealt with? Who's in charge? Who oversees this?
DOUGLAS ELLIOTT: That's the area of biggest disappointment for me in a bill that I generally quite like.
I wish they had consolidated the regulation down to basically two federal agencies: one that would look after the safety and soundness of the banks and then this Consumer Protection Agency. They have really made very few changes in this regard, which means that, in the future, there's still the potential for confusion or for having too many different regulators and have one of them be captured by the industry and regulate in too lax a way.
JEFFREY BROWN: What do you think of that, Nomi Prins, the regulatory structure here?
NOMI PRINS: I agree with Douglas. That is a disappointment. And having the additional layer of the 10-person financial council, which is a combination of regulators, including Ben Bernanke, including Treasury Secretary Tim Geithner and so forth, creates a situation where things can be dropped.
We all know from working in different companies that the more meetings you have, the more people you get together looking at other details, the less potential there is for things to get done. So, I agree with him on that. And it is good that there's a way to resolve potential failure in investment banks or in insurance companies and the like.
The problem is that, right now, the biggest institutions that still trade a lot and still carry enormous risks and assets that they themselves evaluate, because there is no objective means to evaluate them, are Bank of America combined with Merrill Lynch. Goldman Sachs is now a bank holding company. So, it's under the purview, but it is still a company that takes on a lot of risk and trades quite actively in terms of its own profitability. Eighty percent of its profits come from trading.
Morgan Stanley is a bank holding company. So, what's happened in the last two years is we have a financial structure where we have very large, powerful, complex institutions that will stay as large and powerful and complex as they are, where there's an integration of trading and insurance and investment bank activities.
And that hasn't been touched by this bill. And I would argue, that's the main failing of a very large bill with a lot of details and a lot of alterations in it...
JEFFREY BROWN: All right.
NOMI PRINS: ... that, fundamentally, there's no change...
JEFFREY BROWN: And let me ask Douglas Elliott one more issue out of the very many that we could go through here. The Volcker rule, so-called, the -- to get the -- to not -- to restrict companies from trading on their own accounts, what -- what is here and what is not?
DOUGLAS ELLIOTT: Well, the Volcker rule ended up coming through in a fairly strong way, in the sense that the regulators, frankly, don't like the Volcker rule, and I don't either. I don't think it will achieve what it purports to achieve, because it's purporting to take account of excessive investment risk and to limit it.
But it doesn't measure the risk, and it doesn't look at the capability to handle the risk. It goes a different direction. It goes by what the intent of the banker was when they put the investment in place, which I think is somewhat beside the point. We care about the level of risk and the ability to handle it.
But the Volcker rule is being forced down the throats of the regulators. It was tightened up. Originally, the idea was, the regulators would have a fair amount of control over how it was put in place or even potentially whether it was put in place.
JEFFREY BROWN: All right.
DOUGLAS ELLIOTT: But the Senate didn't want that.
JEFFREY BROWN: All right, well a lot of likes and dislikes, and more to come next week.
Douglas Elliott and Nomi Prins, thanks very much.
NOMI PRINS: Thank you.
DOUGLAS ELLIOTT: Thank you.