June 25 — Congressional negotiators today approved the most sweeping overhaul of U.S. financial regulation since the Great Depression, reshaping oversight of Wall Street.
Lawmakers from the House and Senate worked through the night in a 20-hour session to reach deals on a ban on proprietary trading by banks and oversight of the derivatives market.
This month, they’ve also agreed on measures to wind down big firms whose collapse might shake markets, to keep tabs on hedge funds and to make it easier for investors to sue credit rating companies.
“When one says this is the biggest change in our financial regulation in 70 years, that’s not an exaggeration,” Stuart Eizenstat, former deputy Treasury secretary under President Bill Clinton, said today in an interview in Washington. “This is much more profound and much more far-reaching because it really deals with the new financial world that was created in a way by the end of Glass-Steagall.”
A committee of lawmakers from the House and Senate spent two weeks reconciling the bills passed by each chamber. The legislation still needs to be approved by the full House and Senate. Congressional leaders aim to hold those votes next week and present it for President Barack Obama’s signature by July 4.
Obama today praised lawmakers for agreeing on what he called the “toughest” consumer reforms in history. “Credit card companies will no longer be able to mislead you,” he said before leaving the White House for Canada and a three-day economic summit of industrialized and emerging nations.
The new rules in the U.S. will be a model for safeguards that “can protect all nations,” Obama said.
‘Strong Bill’
“This is going to be a very strong bill, and stronger than almost everybody predicted that it could be and that I, frankly, thought it would be,” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters June 23 as lawmakers prepared for the final round of talks. The bill seeks to protect consumers, curb risks, boost surveillance of emerging threats to markets and give regulators more emergency powers to avoid future taxpayer-funded bailouts of too-big-to-fail firms. “They are huge accomplishments,” Senate Banking Committee Chairman Christopher Dodd told reporters June 23.
Whether the legislation — now named the Dodd-Frank bill — takes the right steps, or goes far enough, is still a matter of debate. “It doesn’t reform anything, not anything that needs to be reformed,” said William Isaac, the former chairman of the Federal Deposit Insurance Corp. and now chairman of Fifth Third Bancorp, in a June 23 interview. “We haven’t done anything to repair this 100-year-old regulatory structure.” What follows are the scope, impacts and impetus for some the major provisions, based on the language lawmakers agreed to as of early this morning in Washington:
‘Volcker Rule’
The Obama administration’s proposal to ban banks from proprietary trading, nicknamed the Volcker rule after former Federal Reserve Chairman Paul Volcker, was softened by Senate negotiators. Banks will be allowed to invest in private-equity and hedge funds, though they will be limited to providing no more than 3 percent of the fund’s capital. Banks also can’t invest more than 3 percent of their Tier 1 capital.
Regulators
The change, offered by Dodd, alters language in a bill the Senate approved in May, which would have barred banks from sponsoring or investing in private-equity and hedge funds. Lawmakers offered the modification to appease Senator Scott Brown, a Massachusetts Republican who was concerned the ban would harm Boston-based State Street Corp. He was one of four Republicans to break party ranks and vote for the Senate bill. Senate negotiators also agreed to give regulators less say than previously proposed to define a ban on proprietary trading. Dodd backed a change offered by Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan that “more clearly defines the limits on proprietary trading” by writing the ban into the legislation. The earlier Senate bill would have let regulators write it. The ban on propriety trading, in which a company bets its own money, may reduce profits. Goldman Sachs Group Inc., the most profitable firm in Wall Street history, has said proprietary trading generates about 10 percent of its annual revenue. The firm made $1.17 billion in 2009 from “principal investments,” which include stakes in companies and real estate, according to a company filing.
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