Congress Finalizes Financial Overhaul Bill
This collection of articles describes the details & effects of this new legislation.

House, Senate all-nighter produces financial overhaul bill

By Paul Wiseman, USA TODAY, 6/25/2010
http://www.usatoday.com/money/industries/banking/2010-06-25-financial-overhaul_N.htm?csp=obinsite

Congressional negotiators approved the boldest rewrite of financial rules since the 1930s early Friday, creating a new consumer watchdog, extending regulation to the murky market in derivative investments and taking steps to avoid future Wall Street bailouts.

The legislation, which emerged at dawn after all-night negotiations, will go to the full House and Senate for final approval next week. Democrats hope President Obama can sign the bill into law by July 4.

"This is a tremendous day," said Senate Banking Chairman Christopher Dodd, D-Conn. "After great debate, we have produced a strong Wall Street reform bill that will fundamentally change the way our financial services sector is regulated."

Obama said Friday that he's "gratified" by the bill House and Senate negotiators worked out, which he called the strongest financial reform since the Great Depression.

Obama made a short statement as he was leaving the White House Friday to attend a G-20 summit of world leaders in Canada, where global financial rules are on the agenda.

The legislation comes after a collapse in housing prices threatened to bring down the banking system, resulting in a $700 billion taxpayer bailout and tipping the economy into the worst recession since the Great Depression. The legislation is designed to clean up Wall Street excesses and prevent future bailouts by:

• Creating a Consumer Financial Protection Bureau inside the Federal Reserve to police the financial marketplace on behalf of borrowers and savers. A key cause of the financial crisis was an explosion in high-cost, subprime mortgages to borrowers who could not afford them and in many cases could have qualified for cheaper, conventional loans.
[One of the bureau's first missions, not mentioned in these articles, will likely be to study mandatory binding arbitration. Congress wants the study before it gets to work writing rules governing, or even banning, forced arbitration of consumer contracts.]

• Extending regulation to the $600 trillion market in over-the-counter derivatives, potentially risky investments that nearly wiped out insurance giant American International Group, which was rescued with a $180 billion taxpayer bailout.

• Granting regulators authority to identify and shut down big, failing financial firms before they can damage the entire financial system, and forcing shareholders and unsecured creditors, not taxpayers, to bear the brunt of losses.

Banking lobbyists spent millions of dollars and hundreds of hours trying to kill or water down the bill. To reach a deal last night, congressional negotiators softened a provision that would have forced banks to spin off their highly profitable derivatives operations.

Thomas Donohue, president of the U.S. Chamber of Commerce, denounced the bill: "Today is a sad day for the U.S. economy, for jobs, and for the future of our capital markets," he said. "Consumers will pay the ultimate price in higher fees, less choice, and fewer opportunities to responsibly access credit." ['Just as expected]

Likewise, Edward Yingling, president of the American Bankers Association, said the bill "simply does more harm than good and will make it exceedingly difficult for banks to be the drivers of economic growth and recovery going forward." [Maybe banks should NOT be the ones driving economic growth.]

Research firm CreditSights predicted big banks would move more operations overseas in a "declaration of independence from the new groundrules."

Douglas Elliott of the Brookings Institution said: "The bill will not eliminate financial crises, but it will make them less frequent and considerably milder, which is all we can realistically accomplish."

The legislation touches on a range of financial transactions, from a debit card swipe at a supermarket to the most complex securities deals in downtown Manhattan.

It would affect working class homebuyers negotiating their first mortgage as well as international finance ministers negotiating international regulatory regimes.

House negotiators voted a party line 20-11 in favor of the final agreement; senators voted 7-5, also along party lines.

Republicans complained the bill overreached and tackled financial issues that were not responsible for the financial crisis.

While the legislation addressed the causes of the last meltdown — and more — it left for later a restructuring of government-related mortgage giants Fannie Mae and Freddie Mac. Time and again, Republicans tried to shift the debate to the mortgage purchasing firms, to no avail.

The government took over Fannie and Freddie in 2008 after they suffered heavy loan losses in the housing crash. Their collapse has cost $145 billion and the Obama administration has pledged to cover unlimited Fannie and Freddie losses through 2012, lifting an earlier cap of $400 billion.

The bill exempts auto dealers from regulation by the new consumer bureau, even though they originate nearly 80% of auto loans. But it does make it easier for the Federal Trade Commission to crack down on abuses in auto lending, payday lending and check cashing.

[This seems to imply that car dealers are free to do the same sort of predatory lending as home builders and that consumers would be encouraged to buy newer or more expensive cars than they need or might otherwise buy.]

"It's a victory for auto dealers and for consumers," says Bailey Wood, legislative and communications director for the National Automobile Dealers Association. He says regulation by the new consumer protection bureau would have driven up the costs of auto loans.

To pay for the costs of the bill, negotiators agreed to assess a fee on banks with assets of more than $50 billion and hedge funds of more than $10 billion in assets to raise $19 billion over 10 years.

As they worked toward the home stretch early Friday, negotiators softened a contentious Wall Street restriction that would force large bank holding companies to spin off their lucrative derivatives business.

The deal, negotiated between the White House and Democratic Sen. Blanche Lincoln, eliminated one of the last major sticking points. Congressional leaders were eager to wrap the bill up, with hopes of getting final House and Senate passage next week.

Derivatives are complex securities often used by corporations to hedge their risk against market fluctuations. But they also have become speculative instruments, the most notorious of which were credit default swaps that hedged against loan failures.

In the House, moderate Democrats and members of the New York congressional delegation fought to remove Lincoln's language.

Under the agreement banks would only spin off their riskiest derivatives trades. Banks get to keep some of their lucrative business based on trades in derivatives related to interest rates, foreign changes, gold and silver. They could even arrange credit default swaps, the notorious instruments blamed for the meltdown, as long as they were traded through clearing houses. Banks also would be allowed to trade in derivatives with their own money to hedge against market fluctuations.

Negotiators also limited the ability of banks to carry out their own high-risk trades or invest in hedge funds and private equity funds.

Bank holding companies that have commercial banking operations would not be permitted to trade in speculative investments. But negotiators agreed to let bank holding companies invest in hedge funds and private equity funds, setting an investment limit of no more than 3% of their capital. There are no such conditions on banks now.

Financial overhaul and you: mortgages, debit cards, more...

By Sandra Block, USA TODAY, 6/26/2010
http://www.usatoday.com/money/perfi/basics/2010-06-25-financial-regulations-consumers_N.htm?csp=usat.me

You're not a bank president and you wouldn't know a derivative if someone served you one for dinner. No matter. There are several provisions in the financial overhaul bill that could affect you, especially if you plan to buy a home.

"Consumers have been pounded by the financial crisis, not just from job losses, but from punishing credit-card fees and skyrocketing interest rates," says Pamela Banks, senior policy counsel for Consumers Union. "The bill gives consumers a fighting chance."

DEAL: House, Senate lawmakers finalize deal on bank bill

Here's a rundown of consumer measures in the bill that's headed to House and Senate for a final vote:

Mortgages

• Lenders would no longer be allowed to pay mortgage brokers a commission based on the interest rate for a home loan. Critics have charged that this fee, known as the yield spread premium, encourages mortgage brokers to steer borrowers into risky loans with high interest rates. The law would bar brokers from receiving any compensation tied to the terms of the loan, other than the principal amount. The yield spread premium "is sort of a secret deal between the lender and the broker" that often ends up hurting the consumer, says Ruth Susswein, deputy director for Consumer Action.

The National Association of Mortgage Brokers opposed the provision, arguing that it would prohibit low-cost financing, a popular option for home buyers and refinancers.

The provision would prevent borrowers from paying a portion of their closing costs upfront, and rolling the rest into the loan in the form of a higher interest rate. Under the bill, loan originators will be required to collect all of their fees upfront or roll the entire amount into the loan, says Jim Pair, president of the NAMB.

• Prepayment penalties would be limited or prohibited, depending on the type of loan. Lenders won't be allowed impose any pre-payment penalties on certain types of risky loans, such as loans with a large balloon payment. For 30-year, fixed-rate loans, penalties would be limited to the first three years of the loan.

• Lenders would be required to determine that borrowers can afford the monthly mortgage payments, along with insurance, taxes and assessments. For adjustable-rate mortgages, lenders would have to assure that borrowers can afford the highest rate allowed under the terms of the loan.

This may sound like something lenders are supposed to do, but during the housing boom, many lenders [starting with builder-owned mortgage companies] were cavalier about borrowers' ability to repay loans. Stated income, no-doc and "liar loans," which allowed just about anyone with a heartbeat to buy a house, were rampant. The credit crunch led lenders to tighten their standards, so in some respects, "many of these reforms are going to be locking the barn door after the horse is gone," says Keith Gumbinger, vice president of HSH Associates.

Still, lenders have short memories, and without the legislation, there's no guarantee they won't loosen their standards when the real estate market recovers, Gumbinger says. Real estate markets "burn down every 15 or 20 years or so, and the market doesn't seem to learn from past mistakes," he says.

Credit scores

Consumers who are turned down for a loan would be entitled to receive a copy of the credit score that the lender used to make that decision. Consumers would also be entitled to a free credit score if they were offered a loan at a less-than-favorable rate. You'd have the right to a credit score any time it results in an "adverse action," which could include everything from a job rejection to a higher insurance rate.

However, you won't get a free credit score when you order your free credit reports. Since 2005, all consumers have had the right to a free annual credit report from all three credit bureaus through www.annualcreditreport.com. But the only way to get a credit score is to buy one from one of the credit bureaus or through www.myfico.com.

Mandating free annual credit scores is impractical because lenders and others use many different types of credit scores, says Mark Greene, chief executive of FICO, developer of the widely used FICO score.

For example, some credit scores are tailored for use by credit card issuers, while another is designed for mortgages, he says. "The way out of these woods is to say that the score used in making a lending decision is the score to be provided," he said.

Credit and debit cards

The bill includes a provision aimed at reducing some "interchange fees" — fees banks charge retailers when consumers pay with debit cards. Here's how you could be affected:

•The Federal Reserve Board would be required to determine what constitutes "reasonable and proportional fees" for debit-card transactions, which currently run about 1% of the transaction. The National Retail Federation says lower fees could lead to lower prices for consumers, but other analysts doubt consumers will notice much of a change.

Banks have warned that if interchange fees are reduced, they may have to eliminate debit-card rewards programs and increase other fees to make up for the lost revenue.

Debit cards issued by banks and credit unions with less than $10 billion in deposits are exempt from the rule. Prepaid debit cards used by government agencies to issue unemployment and other benefits are also excluded.

•Retailers would be allowed to offer consumers a discount for using cash, a check or a debit card instead of a credit card. However, lawmakers removed a proposal that would have allowed retailers to give consumers a discount for using a card brand that charges a lower fee than a competing brand.

•Retailers would also be allowed to require a minimum purchase before they'll accept a debit or credit card. So if you're used to using your credit card for your everything, including a $2 cup of coffee, you may need to start carrying cash.

Consumer loans

A new agency, the Consumer Financial Protection Bureau, would have the authority to regulate mortgages, credit cards, payday lenders, check cashing companies, and lenders that provide private student loans. However, auto dealers' financing and insurance arms would be exempt from the agency's jurisdiction.

The auto industry argued that auto dealers aren't banks and didn't play any role in the financial meltdown. The National Automobile Dealers Association also contended that the additional bureaucracy would drive up the price of auto loans.

Consumers groups maintained that placing auto dealers under the consumer agency's jurisdiction would protect consumers from abusive lending practices by unscrupulous dealers. In addition, exempting auto dealerships' finance departments from regulation could give them an unfair advantage over credit unions and small banks, according to the Cambridge Winter Center for Financial Institutions Policy.

Will new financial regulations prevent future meltdowns?

By Paul Davidson, Paul Wiseman and John Waggoner, USA TODAY, 6/25/2010
http://www.usatoday.com/money/companies/regulation/2010-06-25-fixed-or-not_N.htm?csp=usat.me

Congress, in a pointed response to a historic economic downturn, is expected to pass a massive overhaul of financial regulations that would touch nearly every layer of the nation's economy — from home buyers and merchants to giant investment banks.

Now for the $700 billion question: Will it prevent the next meltdown?

No one doubts its ambitions. The nearly 2,000-page measure, finalized late last week by a House-Senate committee, is a legislative Veg-o-matic. Among other things, it aims to better protect consumers, tighten the reins on financial institutions and stop rewarding executives for taking reckless risks to fatten their quarterly earnings and bonuses.

Many consumer advocates and economists say that, at the very least, it sharply reduces the chances of another crash by forcing financial giants to set aside more capital to cover losses and forming a new agency to crack down on deceptive mortgages and other financial products.

But the bill doesn't revamp Fannie Mae and Freddie Mac, the money-losing, government-backed mortgage buyers that financed many subprime mortgages at the heart of the crisis. Democratic leaders say there's no alternative funding source for the giants, which had to be taken over by the government. The measure is also speckled with gaps and loopholes. And it doesn't break up the nation's biggest banks, potentially leaving the door open to future tailspins.

What's more, the next crisis will likely stem from problems the bill doesn't anticipate, says Tom Pax, head of the U.S. bank regulatory group for Clifford Chance. An Associated Press poll this week found 64% of Americans aren't confident the bill would avert a future meltdown. Others say the bill will hurt bank profits and U.S. competitiveness.

Here's a look at how the measure responds to the major causes of the crisis and its chances of preventing future problems.

CONSUMER PROTECTION

What went wrong?

In the easy-money years, millions of consumers took out mortgages they didn't understand and bought houses they couldn't afford. When the bubble burst, it triggered a massive wave of foreclosures, nearly bankrupted the Wall Street firms that packaged the loans into securities, froze credit markets and catapulted the economy into a punishing recession.

At the core of the spiral: No regulatory authority had sole responsibility for protecting consumers from predatory lending and other abuses. The task is [was] divided among different agencies, none of which consider consumer protection their top priority. Without single-minded oversight, mortgage brokers were able to steer homebuyers into expensive subprime mortgages they couldn't handle: Fannie Mae estimates up to half of subprime borrowers could have qualified for conventional mortgages. The fractured system let banks and other firms to shop for the most pliable regulator.

[HOT: Hardly anyone understands the role that large, unregulated and vertically-integrated homebuilders played in getting the government to promote the American Dream of homeownership and in teaching banks and mortgage companies the art of predatory lending, inflating appraisals, and removing accountability. See Texas Homebuilding and the Global Economic Collapse for that perspective.]

What the bill does:

A new Consumer Financial Protection Bureau will be housed inside the Fed. The agency will write and enforce regulations on consumer financial products of all kinds — from payday loans to mortgages. To make sure politicians don't starve the bureau of funding, it will receive a percentage of the Fed's operating expenses, initially about $450 million a year. A council of banking regulators can veto the bureau's rules with a two-thirds vote.

Does it fix the problem?

Consumer advocates had hoped to see a stand-alone agency and worry the new watchdog may suffer from being at the Fed, which until recently showed little interest in consumer protection. And Congress watered down the Obama administration's original plan for the agency. For instance, auto dealers, who originate nearly 80% of auto loans, are exempted from the agency's jurisdiction. Critics also worry about the regulatory council's veto power over the bureau's rules. But Harvard University law professor Elizabeth Warren, who conceived the idea for the bureau, says: "For the first time, there will be a financial regulator in Washington watching out for families instead of banks."

BANK RISK-TAKING

What went wrong:

Big bank holding companies such as Citigroup and investment banks such as Bear Stearns lost billions of dollars in the financial crisis because they used their own money to make speculative trades on mortgage-backed securities and other financial instruments.

When these bets soured amid the subprime mortgage crisis, the institutions were stuck with the toxic assets, decimating their balance sheets and freezing lending markets. The government had to spend hundreds of billions of dollars in taxpayer money to bail them out.

[The speculative trades expected home prices to continue to rise, but artificial incentives to build (and buy) created a growing housing bubble that eventually created a glut of supply that market demand couldn't absorb. The government played a role over decades and, with prodding from homebuilders, provided tax incentives to promote homeownership and relaxed regulatory oversight. With the repeal of the Glass-Steagall Act, evidence shows that many big builders produced substandard homes financed with subprime loans and faulty underwriting.]

What the bill does:

Banks that take federally-insured deposits would be prohibited from making speculative trades and would have to sell off most of their interest in hedge funds and private-equity funds, though they could keep 3% of their capital in the funds. Investment banks would have to set aside additional capital to cover potential losses. And originators of mortgage securities would have to hold 5% of the credit risk so they have a stake in the assets' performance.

[It's not clear if builder-owned mortgage companies must abide by these rules since they are not FDIC insured.]

Does it fix the problem?

Restricting speculative trading "certainly makes sense," says Raj Date, head of the Cambridge Winter Center for Financial Institutions Policy.

Sen. Jeff Merkley, D-Ore., the co-author of that provision, says banks should not take outsized risks or draw from deposits that could be used for lending. "They've been choosing to trade instead of lend," says Heather McGhee of advocacy group Demos.

But Date says the constraint is "considerably harder to police." That's because the legislation permits banks to continue to make proprietary trades for reasons other than speculation. For example, the companies often act as market makers, using their own funds to buy or sell a security to set a price in that market. They typically make a small profit on the transaction.

They also could continue to buy or sell from their own accounts to hedge against other investments. Currently, internal company records distinguish between speculative trades and market-making deals or hedges. But, "Once you prohibit the activity, all of a sudden you have an economic incentive to blur the lines," Date says.

Some think the constraint goes too far. Bob Profusek, a partner in law firm Jones Day, says it will slash U.S. banks' revenue and make them "less competitive."

EXECUTIVE COMPENSATION

Top executives at the nation's largest banks and financial firms reaped big bonuses for pumping up quarterly earnings by buying and selling mortgage-backed securities in the housing bubble. When the subprime mortgage market imploded, it drove the firms into ruin and forced the government to bail them out.

What the bill does:

Shareholders will get a non-binding vote on executive pay. In addition, the SEC would gain legal authority to let shareholders for the first time nominate candidates for seats on corporate boards, which management does now. And compensation committees must be made up of only directors that are independent of the company and its executives. Finally, companies will be required to take back pay that was based on accounting statements that were later found to be inaccurate.

Does it fix the problem?

Giving shareholders a non-binding vote on executive pay will put political pressure on directors to heed their concerns, says Jeff Mahoney, general counsel for the Council of Institutional Investors, which represents pension funds. And allowing shareholders to nominate directors likely will yield boards that are more focused on a company's long-term growth than short-term profits, he says.

But conferees axed a provision that would have made it easier for shareholders to remove directors that approve outsize pay packages.

[From Wikipedia: Watchdogs point out that interlocking directorates, where members of corporate board of directors serve on the boards of multiple corporations, may cause conflicts of interest, poor governance and poor compensation decisions, a lack of fresh perspective, and the concentration of corporate power into a single extended social network. Hopefully this will help to address that problem.]

ENDING TOO BIG TO FAIL

What went wrong: 

During the financial crisis, the government had the legal authority to safely wind down banks but not large non-bank financial companies such as insurance giant AIG or Bear Stearns. When the firms faltered, the government bailed out AIG and financially assisted in Bear Stearns' sale to JP Morgan Chase, believing that letting them go bankrupt would devastate the financial system.

What the bill does:

The Federal Deposit Insurance Corp. would gain new authority to safely shut down non-bank financial firms. Certain secured creditors would be made whole to limit damage to the economy. Taxpayers initially would foot the bill for liquidation but the money would be recouped from shareholders and unsecured creditors, who would bear losses.

Does it fix the problem?

The measure provides a new safeguard that, at least in theory, should allow the government to shutter a failing company and avoid a taxpayer-funded bailout.

But many experts say that if the nation faced another massive financial crisis, Congress would be hard-pressed not to bail out wobbly giants anyway.

"If you have a massive meltdown like we had, (liquidation) is not going to work," partly because too many interconnected players would be threatened at the same time, says Kurt Schacht, managing director of CFA Institute, a nonprofit group of investment professionals.

Closing down even a single financial firm could be a challenge. Some serve as major financial hubs for the economy. Placing such a company in the hands of the FDIC "has never been tested," Date says.

CREDIT RATING AGENCIES

What went wrong?

The top credit rating agencies — Moody's, Standard & Poor's and Fitch — gave thumbs-up ratings to billions of dollars in mortgage securities that turned toxic and almost brought down the financial system. When the housing market tumbled, the agencies scrambled to downgrade the securities.

Critics say it's no accident the rating agencies botched the job: They are paid by the firms issuing debt, not by the investors who rely on their ratings. That allows firms issuing debt to shop around for the most favorable ratings and gives agencies an incentive to build business by inflating credit ratings.

What the bill does: 

The Securities and Exchange Commission would inspect the biggest agencies annually and report its findings publicly. The SEC can fine agencies for failing to comply with financial regulations and deregister agencies that pile up a bad record over time. And agencies must disclose how they assign ratings and abide by more conflict-of-interest rules. The legislation also makes it easier for investors to sue ratings agencies for failing to adequately investigate debt issuers. The bill eliminates many federal requirements that banks and other investors rely on the agencies' ratings. Congress rejected a proposal that would have required the SEC to set up a board to randomly pick which agencies rate securities. Instead, it ordered the SEC to come up with a way to eliminate ratings-shopping.

Does it fix the problem?

The law leaves intact the issuer-pays business model that many critics blame for the agencies' failures. But making the SEC find a way to end ratings shopping "gets to the heart" of the problems with rating agencies, says James Hamilton, analyst at the research firm CCH/Wolters Kluwer Law & Business. The law does take steps toward removing the federal mandates that gave the biggest rating agencies a government stamp of approval and effectively protected them from competition, says Lawrence White, professor of economics at New York University. But overall White calls the bill "one step forward and one step back." He worries increased regulations will raise costs and keep new competitors from entering the ratings business.

DERIVATIVES

What went wrong: 

Derivatives played a role in worsening the credit crisis, and could provoke future crises. A derivative is a synthetic security whose value depends on the movement of something else — interest rates, commodity prices, or securities indices. Although derivatives can help companies hedge against risk, they can also fail spectacularly, because small amounts invested can mean big gains or losses. For example, derivatives played a big role in the downfall of American International Group, one of the biggest bailouts of the credit crisis. Super investor Warren Buffett has called derivatives "weapons of mass financial destruction."

What worries Congress most are derivatives that are negotiated privately between two companies. Credit-default swaps, for example, work somewhat like insurance: Party A agrees to make a series of payments to Party B, who, in turn, will pay up if a bond's issuer defaults. Privately negotiated derivatives are also more difficult for regulators to track and assess for risk.

What the bill does: 

Standardized derivatives would have to be traded on exchanges to increase transparency and routed through clearinghouses to ensure companies that use them post collateral.

Banks would have to spin off their riskier derivatives trading into affiliates, including those that deal in energy, commodities, agriculture and mortgage credit default swaps. They could continue to trade derivatives in-house for interest rates and foreign exchanges and to hedge risk.

Does it fix the problem?

Some of the bill's provisions — heightened supervision, for example, and requirements to hold more collateral — might have helped in the 2008 crisis, says Ian Cuillerier, partner in White & Case's Structured Finance and Derivatives Practice in New York.

William Isaac, former chairman of the FDIC, criticized the requirement to spin off derivatives trading into affiliates, arguing that if a bank's affiliate collapses because of derivatives trading, the bank will probably have to bail the affiliate out anyway. "The bank still has the risk if things go wrong," Isaac says.

STRONGER OVERSIGHT

What went wrong

No regulatory authority was looking out for whether troubles at at one or more financial firms were posing broader risks to the entire financial system and the broader economy. Some banks used a complex web of oversight rules to shop for the most lenient regulator, a process known as regulatory arbitrage. And the trading activities of many banks and investment banks weren't examined closely enough by either the Securities and Exchange Commission or the banking regulators.

What the bill does: 

A new Financial Stability Oversight Council, will identify financial companies — banks or nonbanks — that could pose a threat to the financial system. Its voting members will be the heads of the major regulatory agencies, including the chairman of the Federal Reserve. With council approval, the Fed will have the power to break up large complex firms that pose a threat to the financial system. The Fed will also be able to require those firms to increase their capital — their cushion against losses. [Will the Council will pay attention to builder-owned mortgage companies who have skirted regulatory oversight?]

The central bank, which critics say failed to prevent the mortgage crisis, itself will be subject to more oversight. The Government Accountability Office will be able to audit the Fed's emergency lending during the 2008 crisis, as well as its loans via its discount window.

Hedge funds will have to register with the Securities and Exchange Commission as investment advisers and provide information about trades and portfolio holdings. And the Office of Thrift Supervision will be absorbed into the Office of the Comptroller of the Currency.

Does it fix the problem?

Some say it closes regulatory gaps. "It will eliminate many opportunities for banks to play regulators off each other," says Travis Plunkett, legislative director of the Consumer Federation of America.

Some say the bill didn't go far enough. An early version would have created a super-regulator to oversee most financial companies. Instead, the new bill eliminates one regulator, the Office of Thrift Supervision, but creates a new one.

[The bill does nothing to address the root cause of the financial collapse - THE HOUSING BUBBLE - or the ability for builder-owned mortgage companies to sell their mortgage assets to 3rd party investors. In fact, the government has continued to use artificial incentives, such as the home buyer tax credit, to prop up the housing market and encourage more building when we still have a glut of inventory.]

Government agencies will decide on the details of financial reform

By Paul Wiseman and Fredreka Schouten, USA TODAY, 6/26/2010
http://www.usatoday.com/money/companies/regulation/2010-06-25-implementing-details_N.htm?csp=usat.me

Having reached a grand deal on the biggest overhaul of financial regulation since the 1930s, Congress will soon turn the details over to government agencies, assigning them billion-dollar decisions outside the public's glare.

"Congressional consideration of legislation is like a short brutal battle, compared to the trench warfare of implementing a new law," says Travis Plunkett, legislative director of the Consumer Federation of America.

The financial overhaul bill requires regulatory agencies to pass 350 rules, conduct 47 studies and issue 74 reports, according to the U.S. Chamber of Commerce. The 2002 Sarbanes-Oxley accounting reforms required just 16 rules and six studies.

"Congress gives you the blueprint and the building permit," says David Hirschmann, president of the Chamber's Center for Capital Markets Competitiveness. "Now (regulators have) got to build the house. We all live in houses, not blueprints."

Among the agencies deciding the devilish details:

• A new consumer watchdog agency must consult with an advisory panel to determine the economic impact its rules have on small firms.

• The Federal Deposit Insurance Corp. will decide the details of a new tax on financial companies with assets exceeding $50 billion and hedge funds with assets of more than $10 billion, according to analysis by the investment firm Keefe, Bruyette & Woods.

• The Federal Reserve will have discretion to ban some nonbank firms from trading for their own profit and to limit their investments in hedge and private equity funds, Keefe says.

• The Securities and Exchange Commission and the Commodity Futures Trading Commission will decide which firms are exempt from tough new rules on risky derivative investments. And the SEC will decide whether stock brokers are held to a higher standard of responsibility for what happens to their client's money.

"The SEC was having trouble doing its existing mandates," Hirschmann says. "Now they get 25 new ones."

Consumer advocates worry that lobbyists will weaken rules to protect consumers and prevent a repeat of the financial crisis. More than half of the financial industry's 2,603 lobbyists are former government employees, the activist group Public Citizen found. "Wall Street hires these people for a single reason: They have more influence over the legislative and regulatory process than anyone else," says David Arkush, director of Public Citizen's Congress Watch program.

"The agencies are certainly to a greater or lesser degree sympathetic with the industry," says Karen Shaw Petrou, managing partner of the research firm Federal Financial Analytics. "But they learned their lesson" after lax regulation helped cause Wall Street's meltdown. "I don't think the Fed, for example, will find it as easy as it used to to sweep emerging problems at big banks under the rug."   

On Finance Bill, Lobbying Shifts to Regulations

By BINYAMIN APPELBAUM, New York Times, 6/26/2010
http://www.nytimes.com/2010/06/27/business/27regulate.html?src=twt&twt=nytimes

WASHINGTON — Well before Congress reached agreement on the details of its financial overhaul legislation, industry lobbyists and consumer advocates started preparing for the next battle: influencing the creation of several hundred new rules and regulations.

The bill, completed early Friday and expected to come up for a final vote this week, is basically a 2,000-page missive to federal agencies, instructing regulators to address subjects ranging from derivatives trading to document retention. But it is notably short on specifics, giving regulators significant power to determine its impact — and giving partisans on both sides a second chance to influence the outcome.

The much-debated prohibition on banks investing their own money, for example, leaves it up to regulators to set the exact boundaries. Lobbyists for Goldman Sachs, Citigroup and other large banks already are pressing to exclude some kinds of lucrative trading from that definition.

Regulators are charged with deciding how much money banks have to set aside against unexpected losses, so the Financial Services Roundtable, which represents large financial companies, and other banking groups have been making a case to the regulators that squeezing too hard would hurt the economy.

Consumer groups, meanwhile, are mobilizing to make sure that regulators deliver on promised protections for borrowers and investors. They worry that the shift from Capitol Hill to the offices of regulators could put the groups at a disadvantage.

“It’s out of the public eye, so a natural advantage that we benefit from — public outrage — we lose that a little,” said Cristina Martin Firvida, a lobbyist for AARP, which advocates for older Americans. “We know there’s still a lot here left to do.”

The legislation is intended to expand federal oversight of the financial industry to police risks to the broader economy and to protect consumers of financial products. It would also impose federal regulations for the first time on the trading of derivatives, the complex financial instruments that can be used to make large bets. But Brett P. Barragate, a partner in the financial institutions practice at the law firm Jones Day, estimated that Congress had fixed in place no more than 25 percent of the details of that vast expansion.

“Congress is doing this in broad strokes,” said Scott Talbott, a lobbyist for the Financial Services Roundtable. “Where the rubber meets the road is the regulatory process.”

President Obama hopes to sign the bill into law by the Fourth of July. In his weekly address on Saturday, Mr. Obama said, “I urge Congress to take us over the finish line, and send me a reform bill I can sign into law, so we can empower our people with consumer protections, and help prevent a financial crisis like this from ever happening again.”

His signature will start the clock on dozens of deadlines embedded in the legislation for regulators from a host of agencies, including the Federal Reserve, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation, to make those decisions.

Interest groups have been preparing for months. When the Consumer Bankers Association convened its annual meeting in early June, there was still plenty of time to lobby Congress. But the group’s president, Richard Hunt, told his board that the group should shift its focus to the rule-making process. The board voted to increase the group’s budget and staff.

“Now we hope to have a good give and take with the regulators on the best interests of the consumer and the industry,” said Mr. Hunt.

Shaping regulations is a different game than shaping legislation. Political considerations carry less weight. Instead, regulators crave data that can be used to justify decisions.

Consider the new restrictions on the fees that merchants must pay to banks when customers swipe debit cards. The Nilson Report, a trade publication, estimated that last year, those fees averaged 1.63 percent of the transaction amount.

The legislation directs the Federal Reserve to cap those fees at a level that is “reasonable and proportional” to the cost of processing transactions. It gives the Fed nine months to gather data and decide.

Trade groups for retailers, which want a lower cap, and banks, which want a higher one, are standing by to weigh in.

“We have the data ready and we have the right people ready to go to the Fed, and we’ve had an ongoing dialogue with the Fed,” said John Emling, a lobbyist for the Retail Industry Leaders Association.

The debit card regulations are unusual, however, in pitting the interests of two industries against each other. Many more of the new regulations pit the interests of consumer groups against financial companies.

Historically, industry groups have dominated these information wars, plying regulators with exhaustive studies and detailed analyses of the options at hand. Trade groups have more money and more people, and they often produce and control the relevant information about their business and customers.

Seeking an equalizer, the AARP decided several months ago to begin preparing research that could be presented to regulators on several parts of the bill that it favored. The group was gambling that the provisions — like a requirement that investment brokers act in the interest of their clients — would end up in the final bill.

“We took a risk,” said Ms. Firvida, the group’s government affairs director for financial issues. “Success will depend on how much quality information is in front of the rule makers.”

The legislation would hand consumer groups a series of important victories, most notably the creation of a consumer protection bureau inside the Federal Reserve. But Ms. Firvida and others said there could be a sharp distinction between the authorities granted by the legislation and the results.

Affected companies are nervous as well and are banding together. In the immediate aftermath of the financial crisis, trade groups lost members as banks cut back on spending. That trend has now reversed. The Consumer Bankers Association has added seven members in recent months, bringing its total to 60.

Mr. Hunt, the group’s president, said its role was expanding in direct response to the plan to create the consumer protection bureau, which would focus on regulating his membership.

“The entire financial services industry understands that what happens in Washington affects them,” he said. “It’s something other industries found out many years ago, and we’re finding it out now.”

In a recent letter to the Treasury secretary, Timothy F. Geithner, the American Bankers Association estimated that banks had been hit with 50 new or expanded federal regulations in the last two years. A single example, the credit card bill that passed Congress last year, landed on the desks of bankers as 252 pages of new regulations.

And that count does not include the impact of the new legislation. “It’s a massive compliance burden,” said Edward L. Yingling, the group’s president. “And there is going to be massive uncertainty in the financial industry about how all of this will play out.”

One clear consequence is a surge in the demand for lawyers with expertise in financial regulation, particularly those who have worked for regulatory agencies. Most of the major trade groups are hiring lawyers. The major banks say they are employing more, too.

“I don’t know that there has been a bill that has touched as many different substantive areas as this one,” said A. Patrick Doyle, a partner at Arnold & Porter who has worked on financial issues for three decades. “Clearly there’s going to be a lot of work.”

The surge in hiring has sent a joke bouncing around Washington: Congress finally passed a jobs bill — full employment for lawyers.