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Financial Reform Bill

Senate passes financial reform bill

Marketplace Staff May 21, 2010
Financial Reform Bill

Senate passes financial reform bill

Marketplace Staff May 21, 2010

In a 59-39 vote, the U.S. Senate passed the most far-reaching reform on Wall Street banks since the Great Depression. Included in the Senate’s bill: tougher standards for mortgage brokers, a new consumer watchdog, and a requirement that Wall Street banks spin off their derivatives business. The Senate’s bill must now be merged with a measure approved by the House in December. Democratic leaders are hoping final legislation will reach President Obama’s desk by July 4.

“When this bill becomes law,” said Senate Majority Leader Harry Reid after the vote, “The joyride on Wall Street will come to a screeching halt.”

How different is this Senate bill from what the House passed late last year?

They’re actually pretty similar, though the Senate’s version is a little tougher on Wall Street. Mark Zandi, chief economist at Moody’s Analytics, says that’s due to recent events.

“You have to remember that there’s been a lot of events over the past couple three weeks that I think has influenced the legislation the Senate’s put together — Goldman Sachs and problems in Europe and all kinds of other events that I think has toughened up the bill,” says Zandi.

Both bills establish a new consumer protection watchdog that would set standards and make regulations to protect consumers from predatory lending, excessive fees and interest rates. The House made it a stand-alone agency. The Senate houses it within the Federal Reserve. The House version exempts car dealers from oversight by that agency — a similar exemption was dropped from the Senate bill. Auto dealers have argued that this could stifle a big part of their business — the loans that they make to new car buyers. Both bills require banks to hold more capital to cover their debts and hedge funds over a certain size to register with the SEC. Both bills set up a system for unwinding big failing firms, but the House version included a fund that would pay for that. The Senate rejected that idea. Democrats are confident differences will be worked out.

What causes of the financial crisis aren’t addressed by this bill and what problems might arise out of it?

Critics say the Senate bill isn’t as tough on risky trading as it could have been, that it doesn’t force mega-banks to get smaller. Some say it doesn’t go far enough to restrict the trading that these banks do for their own profit. The bill leaves it up to regulators to write rules about so-called proprietary trading. Simon Johnson, former chief economist at the IMF, told the BBC that leaves the banks off the hook.

“They can carry on doing almost exactly what they were doing prior to September 2008. In particular, these so-called banks have transformed themselves into really very large speculative funds. They can take huge bets and when it goes well, they make a lot of money. When it goes badly, it’s someone else’s problem. It gets shoved onto the taxpayer,” said Johnson.

Chris Low, chief economist at FTN Financial, says the bill will make our economy safer, but it will also make it grow more slowly.

“That’s because when you eliminate certain types of credit — even credit that wasn’t well advised in the first place — it has an economic impact. And when you do it in a way where every country is sort of going off and regulating in its own direction, you also run the risk that U.S. financial companies won’t be able to compete on the global stage,” says Low.

How much are these rules going to cost Wall Street?

Analysts quoted by The Wall Street Journal say it could still cut profits at the big banks by roughly 20 percent — and a lot of that is due to restrictions on derivatives, which can make up to half of the banks’ trading profits.

Yesterday the Dow’s 376-point dive was the biggest drop point in more than a year. Can we attribute that to the Senate passing its financial reform bill?

Some people are doing that already. And the reason for that is uncertainty about what these reforms would mean for Wall Street profits. It’s a lot of change all at once, and I’m sure across Manhattan, analysts are pouring through the bill as we speak. But take the reform package out of the equation and you still have the debt crisis in Europe. And if you look at the bigger picture in the markets, the Dow is down 8.5 percent in the month of May. That’s not because of financial regulatory reform, it’s because investors are concerned about Europe.

Is the looming financial regulatory crackdown in the U.S. and abroad spooking investors?

Investors are fretting about a disorderly, uncoordinated crackdown. Other countries are taking their own approach different from the U.S. Germany has slapped a ban on some types of speculation. And Britain is considering whether to break up some of its banks.

Justin Urquhart Stewart of Seven Investment says the uncertainty is spooking the markets.

“What you’re seeing at the moment is politicians almost making it up on the hoof. And that’s one of the issues that’s concerning markets at the moment because they need a level of consistency as to what the rules are and how they’re going to be applied,” he says.

Britain’s new Prime Minister David Cameron is expected to stress the need for international consensus on new financial regulations at a meeting today.

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