It took all night to do it — not to mention the many months that have passed since the emergence of the financial crisis of 2008 — but negotiators in the House and Senate approved a financial reform bill at dawn Friday that would overhaul regulation of Wall Street, the banking world and the financial sector.
Often characterized as the most sweeping set of changes in financial regulation since the Great Depression, the bill largely preserves the shape of legislation crafted in recent weeks: Some of its most significant provisions would:
Give the government the power to wind down and seize failing firms
Create a consumer protection agency under the authority of the Federal Reserve
Require banks to spin off their riskiest derivatives activities
- Curb the ability of firms to trade their funds for their own profit
But just how much the bill accomplishes — and whether it guards against excessive risk in the financial system to protect from future crises — depends on your point of view. On that count, the view was decidedly mixed.
Some saw the fact that markets opened positively to the news as just one sign that business would not be fundamentally changed. (Banks “dodged a bullet” is the way one analyst put it to BusinessWeek.) And the bill neither alters the fundamental structure of Wall Street nor does it break up any of the biggest firms as critics have called for.
It also does not reimpose laws similar to the Glass-Steagall Act that passed after the Great Depression (and partially repealed in 1999) that separated the activities of commerical and investment banking.
But many echoed the sentiments of Sen. Chris Dodd, D-Conn., the chair of the Senate Banking Committee and one of the leading architects of legislation, who called it “a Wall Street reform bill that will fundamentally change the way our financial services sector is regulated.”
Bill Winters, the former co-chief executive of JP Morgan Chase’s investment bank, told Bloomberg Televison Friday: “It’s certainly a strong bill. It will have an impact on the banks for some time to come.”
But he also said at the same time, “it’s nowhere near as bad as what the banks may have feared as recently as a week ago.”
Consumers will see a series of changes as well, from the creation of the consumer protection agency, new rules on credit and debit cards and mortages regulatons. Several consumer groups generally were favorable to the deal, including the Consumer Federation of America.
The federation, for example, praised one significant provision of the bill that survived a fierce fight from the banks — the regulation of swaps and derivatives markets, estimated to be worth hundreds of trillions of dollars. Under the compromise approved Friday morning, banks would have to spin off some of the riskiest swaps trading they do, but could continue to engage in foreign-exchange and interest-rate swaps dealing, which account much of derviatives activity.
“While they (banks) won a few battles, they lost the war,” wrote Barbara Roper, the CFA’s director of investor protection. “Overall, on the key issues of moving the majority of clearable swaps into central clearing, requiring exchange trading, increasing capital and margin requirements and other measures to improve the stability, transparency, and regulatory oversight of this market, the bill takes enormous strides.”
Some said that the bill doesn’t change the game, but still had important protections in it.
“The one clearly positive thing here is the consumer protection agency,” Dean Baker, the co-director of the Center for Economic and Policy Research in Washington, D.C., told the NewsHour. “There were compromises, but at the end of the day, it survives largely intact as an independent agency with an independent source of funding.”
But Baker, who also was encouraged by the government’s new resolution authority to wind down troubled institutions and by the derivatives changes, says “we’re still looking at large institutions that are clearly way too big to fail. Some are even bigger than they were going into the crisis.”
Baker also worries that in the end, much of the responsibility will come down to regulators like Fed Chairman Ben Bernanke whom he contends missed acting on the danger signs until it was too late.
“I really worry that we haven’t done anything about incentives to regulators,” Baker said. “They have to understand that if they don’t clamp down, they’re going to pay a price. And yet no regulators, none of them, paid a price. I worry that as banks changes things, that where there are situations where regulators should clamp down, they won’t do it. Given the option of getting themselves into a lot of heat with financial institutions or looking the other way, they’re going to look the other way.”
Two major players were left out of the bill and the negotiations the whole time: Mortgage lending giants Fannie Mae and Freddie Mac, which have already received more than $145 billion in assistance from the taxpayers. Many Republicans — and a few Democrats — were angry that Democrats did not include Fannie and Freddie in the reforms. Given their huge role in the mortgage market, the Obama administration says it plans to turn attention to them next year. Many on Capitol Hill remain skeptical that will happen.
Tune in to Friday’s NewsHour for more on the financial reform deal.