The Wall Street Journal
Biggest Regulatory Overhaul of Wall Street Since Depression Moves Closer to Law
Sen. Christopher Dodd, left, smiles while flanked by Senate Majority Leader Harry Reid (second from the right), Sen. Richard Durbin (right), Sen. Blanche Lincoln (second from the left) and Sen. Mark Warner after the Senate voted to pass Wall Street reform on Thursday
WASHINGTON—The Senate on Thursday approved the most extensive overhaul of financial-sector regulation since the 1930s, hoping to avoid a repeat of the financial crisis that hit the U.S. economy starting in 2007.
The legislation passed the Senate 59 to 39 and must now be reconciled with a similar bill passed by the House of Representatives in December, before it can be sent to President Barack Obama to be signed into law.
The controversial measure, supported by the Obama administration, sets up new regulatory bodies and restricts the actions of banks and other financial firms. It is designed to try to make order of the cascading regulatory chaos that ensued in 2008 when mammoth banks and some unregulated financial firms collapsed, and public funds were used to save them. Among other things, the legislation would:
• Establish a new council of "systemic risk" regulators to monitor growing risks in the financial system, with the goal of preventing companies from becoming too big to fail and stopping asset bubbles from forming, such as the one that led to the housing crisis.
• Create a new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit-card issuance.
• Empower the Federal Reserve to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
• Allow the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.
• Give regulators new powers to oversee the giant derivatives market, increasing transparency by forcing most contracts to be traded through third-parties instead of only between banks and their customers. Derivatives, which are complex financial instruments, are often used to hedge risk. Speculative trading in the contracts led to losses at many banks in the 2008 crisis.
"Simply, the American people are saying, 'you've got to protect us,' and we didn't back down from that," said Senate Majority Leader Harry Reid (D., Nev.). "When this bill becomes law, the joyride on Wall Street will come to a screeching halt."
Opponents of the bill worry that the government is overreacting, and over-regulating the financial industry. They worry the measures will crimp the free flow of capital in the U.S. economy.
"It will inevitably contract credit," said Sen. Judd Gregg (R., N.H.), who says the Senate bill "is probably undermining the system…probably making for a weaker system."
Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate's two independents in support of the package. Two Democrats voted against the bill, and two senators weren't present for the vote.
Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.
The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.
Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.
One flashpoint will be over the Federal Reserve. The House bill includes a provision that would allow the Government Accountability Office, the investigative arm of Congress, to audit emergency lending and some monetary policy decisions made by the Fed. The Senate bill would allow the GAO to study the emergency lending that occurred during the financial crisis, but it would not be authorized to audit decisions made in the future.
Another area of conflict is how to regulate trading of derivatives. Both bills require most derivatives to be traded through third parties, with the intent of increasing transparency. But the Senate bill goes farther by making it more difficult for companies to be exempt from the new rules. There's also a provision in the Senate bill that could force big banks to spin off their derivatives operations.
Both bills would create a new council of federal regulators with broad authority to protect the financial system from the sort of "systemic" risk that spread rapidly through the economy in 2008. The House bill would let the council impose several forms of restriction, including requiring companies to set aside additional capital, if the council believes a firm has taken on too much risk. The Senate bill leaves that power to the Federal Reserve.
The House bill also includes a provision that would empower the government to force any bank to stop certain practices, or even divest certain operations, if regulators fear there is a risk posed to the broader economy.
The Senate bill, meanwhile, includes a provision that would essentially force banks to stop "proprietary trading," or making market bets with their own capital. It would also make it more difficult for big banks to grow, by setting new limits on the amount of liabilities they can control.
If a bank does fail, both bills would give the government more power—and resources—to break up the collapsing companies. Among other things, the House bill would create a $150 billion fund, financed by big financial companies, which would be used to unwind failed firms. The intent is to prevent taxpayers from having to pay the tab.
But opponents of the measure worry that regulators might be tempted to use the fund to prop up a failing firm. So the Senate bill has provisions under which a company would be liquidated and the bill for the work would be subsequently paid by a levy on large financial companies.
The Senate bill would also try to force almost all failing financial companies through a bankruptcy-type process, while the House bill would make it easier for regulators to take over and bust up a failing firm without going through the courts.
For consumers, the House and Senate bills would expand protections, creating a new regulator with the autonomy to oversee a range of financial companies, from federally regulated banks to small finance companies. Under the House bill, the agency would be independent, while the Senate bill would place the consumer agency within the Federal Reserve.
The legislation passed the Senate 59 to 39 and must now be reconciled with a similar bill passed by the House of Representatives in December, before it can be sent to President Barack Obama to be signed into law.
The controversial measure, supported by the Obama administration, sets up new regulatory bodies and restricts the actions of banks and other financial firms. It is designed to try to make order of the cascading regulatory chaos that ensued in 2008 when mammoth banks and some unregulated financial firms collapsed, and public funds were used to save them. Among other things, the legislation would:
• Establish a new council of "systemic risk" regulators to monitor growing risks in the financial system, with the goal of preventing companies from becoming too big to fail and stopping asset bubbles from forming, such as the one that led to the housing crisis.
• Create a new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit-card issuance.
• Empower the Federal Reserve to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.
• Allow the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.
• Give regulators new powers to oversee the giant derivatives market, increasing transparency by forcing most contracts to be traded through third-parties instead of only between banks and their customers. Derivatives, which are complex financial instruments, are often used to hedge risk. Speculative trading in the contracts led to losses at many banks in the 2008 crisis.
"Simply, the American people are saying, 'you've got to protect us,' and we didn't back down from that," said Senate Majority Leader Harry Reid (D., Nev.). "When this bill becomes law, the joyride on Wall Street will come to a screeching halt."
Opponents of the bill worry that the government is overreacting, and over-regulating the financial industry. They worry the measures will crimp the free flow of capital in the U.S. economy.
"It will inevitably contract credit," said Sen. Judd Gregg (R., N.H.), who says the Senate bill "is probably undermining the system…probably making for a weaker system."
Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate's two independents in support of the package. Two Democrats voted against the bill, and two senators weren't present for the vote.
Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.
The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.
Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.
One flashpoint will be over the Federal Reserve. The House bill includes a provision that would allow the Government Accountability Office, the investigative arm of Congress, to audit emergency lending and some monetary policy decisions made by the Fed. The Senate bill would allow the GAO to study the emergency lending that occurred during the financial crisis, but it would not be authorized to audit decisions made in the future.
Another area of conflict is how to regulate trading of derivatives. Both bills require most derivatives to be traded through third parties, with the intent of increasing transparency. But the Senate bill goes farther by making it more difficult for companies to be exempt from the new rules. There's also a provision in the Senate bill that could force big banks to spin off their derivatives operations.
Both bills would create a new council of federal regulators with broad authority to protect the financial system from the sort of "systemic" risk that spread rapidly through the economy in 2008. The House bill would let the council impose several forms of restriction, including requiring companies to set aside additional capital, if the council believes a firm has taken on too much risk. The Senate bill leaves that power to the Federal Reserve.
The House bill also includes a provision that would empower the government to force any bank to stop certain practices, or even divest certain operations, if regulators fear there is a risk posed to the broader economy.
The Senate bill, meanwhile, includes a provision that would essentially force banks to stop "proprietary trading," or making market bets with their own capital. It would also make it more difficult for big banks to grow, by setting new limits on the amount of liabilities they can control.
If a bank does fail, both bills would give the government more power—and resources—to break up the collapsing companies. Among other things, the House bill would create a $150 billion fund, financed by big financial companies, which would be used to unwind failed firms. The intent is to prevent taxpayers from having to pay the tab.
But opponents of the measure worry that regulators might be tempted to use the fund to prop up a failing firm. So the Senate bill has provisions under which a company would be liquidated and the bill for the work would be subsequently paid by a levy on large financial companies.
The Senate bill would also try to force almost all failing financial companies through a bankruptcy-type process, while the House bill would make it easier for regulators to take over and bust up a failing firm without going through the courts.
For consumers, the House and Senate bills would expand protections, creating a new regulator with the autonomy to oversee a range of financial companies, from federally regulated banks to small finance companies. Under the House bill, the agency would be independent, while the Senate bill would place the consumer agency within the Federal Reserve.
What's in the Fine Print
Key parts of the Senate bill and where it differs from the House version
Consumers
Senate version
* Consolidates responsibilities from seven agencies into a Bureau of Consumer Financial Protection within the Federal Reserve system to oversee products made available to consumers
* Limits ability of mortgage lenders to assess penalities on borrowers who pay off the loan early
* Prohibits paying brokers and loan officers more to steer borrowers to higher interest rates or certain risky features; commissions would be based on the size or number of loans originated
How House bill differs
* Oversight would be independent of the Fed and exclude insurance companies, auto dealers and accountants, among others
Investors
Senate version
* Creates Investment Advisory Committee within Securities and Exchange Commission
* Creates Office of Investor Advocate within SEC to identify problems in dealing with SEC and provide assistance
* Gives SEC the authority to grant shareholders proxy access to nominate directors
* Requires directors to win by majority vote in uncontested elections
* Gives shareholders the right to nonbinding vote on executive pay, excluding golden parachutes
How the house bill differs
* Would require institutions with assets of at least $1 billion to disclose to regulators the structures of all incentive-based compensation
Banks
Senate version
* Eliminates Office of Thrift Supervision
* Federal Reserve Board would keep oversight of largest bank holding companies
* State banks and holding companies would either be regulated by the Fed or FDIC
* National banks with less than $50 billion in assets would be under Office of the Comptroller of the
Currency
* Banks would be generally barred from using their own capital to engage in speculative trades
How the house bill differs
* Preserves the Fed's and FDIC's bank-supervision roles; calls for OTS to be absorbed by the OCC
Markets
Senate version
* Hedge Funds: Requires investment advisers of hedge funds with $100 million or more in assets to register with the SEC
* Derivatives: Requires that many derivatives and overthe- counter financial products be traded on regulated platforms
* Securitizations : Requires companies that package loans into marketable securities to hold at least 5% of the credit risk
* Requires issuers to disclose more information about and analyze the quality of underlying assets
How the house bill differs
* Applies to funds with assets of $150 million or more; exempts venture-capital funds
* Exempts many end users from mandatory central clearing
* Exempts education, agriculture, veterans and small-business loans
Insurers
Senate version
* Creates Office of National Insurance within Treasury to monitor industry, recommending to the systemic-risk council insurers that should be treated as systemically important
* Office would recommend ways to modernize insurance regulation, but it is explicitly not a new regulator
How the house bill differs
* Proposes creation of a Federal Insurance Office with similar characteristics
Other Elements
Senate version
* Creates office at SEC to administer credit rating agencies' rules and practices
* Creates Financial Stability Oversight Council, led by Treasury secretary, with nine voting members. Agency would identify systemic risks to the economy, promote market discipline and respond to emerging risks. It would also write regulations for risk-based capital, leverage and liquidity requirements
How the house bill differs
* Also creates seven-member advisory board for credit raters
* Large firms would pay into a $150 billion fund to manage the dissolution of failing firms considered systemically significant
