Lawmakers Agree on Historic Financial Industry Reforms

By and | June 25, 2010

U.S. lawmakers hammered out a historic overhaul of financial regulations as dawn broke over the nation’s capital Friday, handing President Barack Obama a major domestic victory on the eve of a global summit devoted to financial reform.

In a marathon session of more than 21 hours, legislators agreed to a rewrite of Wall Street rules that will crimp the industry’s profits and saddle it with tougher oversight and tighter restrictions.

The reform must still win final approval from both chambers of Congress before Obama can sign it into law, giving Wall Street one final chance to deploy its army of lobbyists on Capitol Hill. Quick approval is expected and the reform could go to Obama for his signature by July 4.

The bill has actually gotten tougher in its yearlong journey through the halls of Congress. Democrats rode a wave of public disgust at an industry that awarded itself rich paydays while much of the country struggled through a deep recession caused by its actions.

“We worry about big money. I worry about big money having a corrupting influence, but it is reassuring to know that when public opinion gets engaged, it will win,” said Democratic Representative Barney Frank, who headed the panel.

In the final predawn hours, lawmakers reached agreements on the bill’s most controversial sections, which restrict derivatives dealing by banks and curb their proprietary trading in an effort to shield taxpayer-backed deposits from more risky activities. But the industry won significant concessions that could lessen the sting.

The most sweeping rewrite of financial rules since the 1930s aims to avoid a repeat of the 2007-2009 financial crisis, which touched off the recession and led to taxpayer bailouts of floundering financial giants. Financial institutions would have to pay $19 billion to cover its costs.

“There is no way to view this bill as a positive for the financial sector,” wrote Concept Capital analyst Jaret Seiberg, who noted that it could have been much worse.

Democrats raced to complete their work before Obama traveled Friday to Canada for the Group of 20 meeting of economic powers, scheduled for Saturday and Sunday. Obama will be able to tout the reform as a blueprint for other countries as they try to coordinate their reform efforts.

Passage of the bill, now widely expected, will also give Democrats an important legislative victory, alongside healthcare reform, ahead of congressional elections in November. The House could vote as soon as Tuesday, Frank said.

CURBS ON RISKY TRADING

Lawmakers munched chocolates to stay awake as regulators and administration officials hovered in the wood-paneled room, and as the night wore on, they yielded the microphones to staff to debate the bill’s finer points.

The panel completed its work just after 5:30 a.m., more than 21 hours after it sat down to its final negotiating session.

Along the way, the negotiators resolved several sticking points that had threatened to scuttle the bill.

They agreed to water down a proposal by Democratic Senator Blanche Lincoln that would have required banks to spin off their lucrative swaps-dealing desks to a separately capitalized affiliate.

Dozens of House of Representatives Democrats said Lincoln’s proposal would force trading to move overseas, and threatened to vote against the bill if it included the provision.

The compromise allows banks to stay involved in foreign-exchange and interest-rate swaps dealing, which account for the bulk of the $615 trillion over-the-counter derivatives market.

They also could participate in gold and silver swaps and derivatives designed to hedge banks’ own risk.

They would need to spin off dealing operations that handle agricultural, energy and metal swaps, equity swaps, and uncleared credit default swaps.

Lawmakers resolved another controversial element of the bill around midnight when they agreed that banks should face restrictions on their risky trading activities.

As with Lincoln’s swaps provision, the financial industry won significant last-minute concessions in that rule, named for White House economic adviser Paul Volcker.

The final version of the Volcker rule would give regulators little wiggle room to waive the trading ban but would also allow banks to invest up to 3 percent of their tangible equity in hedge funds and private equity funds.

The bill would dramatically reshape the financial landscape in the United States.

It sets up a new consumer-protection authority and gives regulators new power to seize troubled financial firms before they harm the broader economy.

Though it leaves largely intact the patchwork of federal regulators that failed to stop the last crisis, it sets up an interagency council to monitor system-wide risks to stability.

It forces much of the over-the-counter derivatives market, which worsened the financial crisis and led to a $182 billion bailout of insurer AIG, onto more accountable channels like clearinghouses and exchanges.

Larger banks face will have to raise more capital to help them ride out future crises.

Credit-rating agencies such as Moody’s Corp could see their business models upended by regulators seeking to resolve conflicts of interest, while debit-card issuers like Bank of America will probably have to reduce the transaction fees they charge merchants who use their cards.

[The bill creates a federal office of insurance with authority to review international insurance agreements but without any real regulatory authority. State regulation of the insurance industry remains in place. The bill also includes regulatory streamlining provisions sought by the surplus lines insurance industry.]

(Additional reporting by Roberta Rampton, Rachelle Younglai and Kevin Drawbaugh; writing by Andy Sullivan; Editing by Alistair Bell and Jackie Frank)


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