Lawmakers on Thursday approved a landmark financial reform bill that would fundamentally change the way Wall Street is regulated, representing the largest expansion of government oversight in decades.
The bill vastly reshapes federal agencies and creates several more, including a new Financial Services Oversight Council to monitor financial markets and a Consumer Financial Protection Bureau, within the Federal Reserve, to police lending.
The bill passed 59-39, with four Republicans joining the Democratic majority in favor. Two Democrats, Russ Feingold of Wisconsin and Maria Cantwell of Washington, opposed the measure, saying it did not go far enough.
According to The Wall Street Journal, Feingold wanted the bill to include provisions to bar investment banks from affiliating with retail banks, along the lines of the Glass-Steagall Act, parts of which were repealed in 1999:
“We need to eliminate the risk posed to our economy by ‘too big to fail’ financial firms and to reinstate the protective firewalls between Main Street banks and Wall Street firms,” said Mr. Feingold, who is up for re-election this year. “Ending debate on the bill is finishing before the job is done.”
Mr. Feingold also wants the bill to include additional restrictions, notably on the size and complexity of U.S. banks. Efforts to include specific amendments to address the issue either failed or didn’t get a vote.
The bill passed by the Senate requires derivatives, such as credit-default swaps, to be traded openly on exchanges. As NPR explains, such a system would make it less likely that toxic deals would poison the rest of the financial system:
Requiring trades to go through a central clearinghouse means that if one party to a contract goes bankrupt, the clearinghouse will step in and make good on the deal. Requiring trades to be posted on an exchange means the flow of trades, and the prices, will be available to the public.
The bill also requires banks to spin off their lucrative derivatives units into separate businesses. This is meant to move the risk associated with derivatives away from banks. Opponents of this piece of the measure — which is not included in the House version of the bill — argue that it could push derivatives trading overseas, to less-regulated markets.
The Senate measure also empowers federal officials to take over and dismantle failing financial firms, before the collateral damage from their collapse harms the rest of the economy. But as Mother Jones notes, lawmakers abandoned the idea of a $50 billion emergency fund, which would have provided a form of insurance for such collapses:
The bill gives the government the power to wind down and euthanize banks that somehow do become too-big-to-fail. While a proposed $50 billion fund, paid into by the banks, that would’ve been used to wind down big banks was killed, the bill empowers regulators to wind down and liquidate systemically risky banks. Moreover, those liquidation efforts, as the bill says, would not cost the taxpayers a nickel, unlike the infamous TARP bailout of 2008.
The bill now heads to conference, where lawmakers will hash out differences with a financial reform bill passed by the House earlier this year. See Need to Know’s previous economic coverage for more on the financial crisis and its impact: