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House Approves Wall Street Reform Bill

December 11, 2009 - by Donny Shaw

More than one year after the crisis on Wall Street, the House of Representatives today passed a landmark bill (H.R. 4173) to fix some of the regulatory lapses that are alleged to have caused the crisis and puts in place new mechanisms for preventing “too big to fail” banking and the resulting bailouts.

The final vote tally was 223-202, with all Republicans voting against the bill. Twenty-seven Democrats voted against the bill — mostly Blue Dogs and pro-business New Democrats who thought the bill went too far.

More news coverage: New York Times, The Hill, Bloomberg

It’s a big, 1,300+ page piece of legislation combining several separate bills together. A two-page outline (.pdf) can be downloaded from the Financial Services Committee. Below is my description of three of the biggest provisions in the bill:

Consumer Financial Protection Agency

The Consumer Financial Protection Agency, or CFPA, would be a stand-alone regulatory body charged with promoting “transparency, simplicity, fairness, accountability, and equal access in the market for consumer financial products or services.” Their area of oversight would apply to almost all consumer financial products or services, including mortgages, credit cards, debit cards, car loans, gift cards, credit score reporting companies, debt collectors and financial advisers. Auto dealers and pawnbrokers would be exempted.

The Agency would essentially have authority to determine what consumer financial products or services under their jurisdiction are unfair, deceptive, abusive, or discriminatory and make rules to ban them, restrict them, or place them under special conditions. The bill also gives the Agency a number of more specific authorities and mandates. They would have the power to issue subpoenas, collect fines and pay them out to victims of unfair and deceptive practices in the consumer financial market, and restrict mandatory pre-dispute arbitration clauses in consumer financial product agreements.

Systemic Risk Mitigation/Resolution Authority

In order to deal with the problem of having to bail out financial institutions that are so big and interconnected that their failure would crash the rest of the economy, the bill would give the Treasury Secretary new authority to break up financial firms it deems insolvent. The bill would not put any hard caps on size or interconnectedness in order to stave off the too big to fail problem. It also would not allow the Treasury Secretary to break up firms pre-emptively. They would have to be determined to be insolvent and the Federal Reserve Board would have two vote to certify the firm’s status as a risk to the financial system.

The bill would also create an inter-agency Financial Stability Council that would identify systemically risky firms and subject them to stricter regulations. For example, the firms would be subject to leverage limits, liquidity requirements and risk-based capital requirements.

Regulating Over-the-Counter Derivatives

To stem abuses in the secretive over-the-counter derivatives markets that helped bring down A.I.G. and Lehman Brothers, the bill would require all standardized swap transactions between “major swap participants” to be cleared. Major swap participants would also be subject to capital and margin requirements in order to ensure that the they could actually make good on their bets if they had to. Reform advocates wanted to require derivatives to be traded out in the open on electronic exchanges, but the final bill does not require that. Under the bill, trades only have to go through a “swap execution facility” which is defined as “a person or entity that facilitates the execution or trading of swaps between two persons through any means of interstate commerce, but which is not a designated contract market, including any electronic trade execution or voice brokerage facility.” In other words, a swap could be cleared simple through a telephone call.

Significantly, the derivatives regulations section has some major exemptions. All foreign exchanges (approx. 8% of swaps) would be exempt from clearing. All “end users” of derivatives, like manufacturers and energy companies (approx. 21% of the market), would also be exempt from clearing requirements.

The Senate still has to act on their regulatory overhaul bill before it can become law. They are moving much more slowly and a Senate votes is not expected for a number of months.

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