With the passage of the $700 billion rescue package, the financial industry will face greater congressional scrutiny in coming weeks and months.
Further-reaching regulation is almost certain. Previously obscure corners of the industry now subject to few rules, such as complex derivatives and hedge funds, could face federal supervision for the first time. Meanwhile, heavily regulated sectors, such as banking and insurance, are likely to face greater oversight.
Having passed the bailout bill, Congress is now shifting its attention to its next steps. “Passing this legislation is only the beginning of our work,” said House Speaker Nancy Pelosi, D-Calif., just before the House approved the package.
Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, said next year Congress will seek to overhaul housing policy and financial regulation in a legislative effort he likened to the New Deal.
“We were the EMTs rushing to the rescue of an economy that suddenly found itself choking, but now we have to perform more serious reform,” Frank said.
The House Agriculture Committee, which has some oversight of commodities and futures trading, plans to hold a hearing this month on a class of derivatives known as credit default swaps. AIG held huge amounts of credit default swaps, which act as insurance against bond defaults. The prospect that AIG wouldn’t be able to pay out the swaps was a major reason the government took over the company.
Emerging Battle Lines
The battle lines are already emerging for next year’s fight. Industry lobbyists will push to consolidate the numerous financial regulatory agencies, similar to a proposal outlined by Treasury Secretary Henry Paulson earlier this year. To prevent future meltdowns, they want the Federal Reserve to focus on “systemic risk,” or the risk that individual banks pose to the larger financial system.
Business groups also will push to loosen accounting standards that they blame for deepening the current crisis.
Some consumer groups, meanwhile, argue that structural changes to the financial regulatory system aren’t as important as having regulators enforce existing rules more strictly.
If regulators had cracked down on abusive lending practices in the mortgage industry several years ago, much of the current meltdown could have been avoided, said Travis Plunkett, legislative director for the Consumer Federation of America.
Congress will also have to figure out the future of Fannie Mae and Freddie Mac, the mortgage giants taken over by the government in September after sustaining huge losses.
There’s a broad consensus that the two companies’ hybrid structure as government-backed entities and for-profit private companies put them in the difficult spot of serving two conflicting goals: provide financial support for the housing market while also maximizing shareholder profit.
The two companies could end up as much smaller federal agencies, or they could be fully privatized, among other options.
How the push for new regulations will play out depends, in part, on whether Republican presidential nominee Sen. John McCain or Democratic nominee Sen. Barack Obama wins the White House.
No matter who is president, the next set of officials at financial agencies such as the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission will likely be much tougher. “In the future, I think we’ll see fewer political hacks and industry mouthpieces and more competent regulators,” said Howard Glaser, an industry consultant who has worked for Fannie Mae and Freddie Mac.
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