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Thursday, July 15, 2010

U.S. Senate passes final version of H.R. 4173 (Restoring American Financial Stability Act)

Earlier today, by a vote of sixty to thirty nine, the U.S. Senate passed the final version of H.R. 4173, officially known as the Restoring American Financial Stability Act, but commonly known as the financial services reform bill.

The vote for and against final passage was bipartisan, but just barely. Three Republicans — Olympia Snowe, Susan Collins, and Scott Brown — voted aye, while one Democrat, Russ Feingold, voted nay. Senators in the Pacific Northwest broke for and against the bill strictly on party lines.

Feingold had earlier voted against the Senate's incarnation of the bill, as did our own Maria Cantwell, but unlike Senator Cantwell, he refused to change his vote, saying that he didn't feel the measure went far enough.

"With today’s vote in the Senate, the United States Congress has now passed a Wall Street reform bill that will bring greater economic security to families and businesses across the country," President Obama said in remarks delivered from the White House's South Driveway.

"The financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate. This reform will foster that innovation, not hamper it. It’s designed to make sure that everyone follows the same set of rules, so that firms compete on price and quality, not on tricks and traps," the President added.

"It demands accountability and responsibility from everybody. It provides certainty to everyone from bankers to farmers to business owners to consumers. And unless your business model depends on cutting corners or bilking your customers, you have nothing to fear from this reform."

The Pacific Northwest's Democratic senators, who all voted aye, were quick to release statements celebrating the bill's passage.

Senator Murray got out the door first:
With this vote today, the era of taxpayer-funded Wall Street bailouts is officially over. This bill is going to make sure that Washington state families and small business owners are protected from predatory Wall Street tactics. And it will guarantee that American taxpayers will never again be on the hook to bail out the big banks. I was proud to stand up for my state’s families today and against the Wall Street lobbyists and special interests who were fighting so hard to protect big banks and maintain the status quo.
Murray's release also included a statement from John Collins, the President of the Community Bankers of Washington State, evidently intended to deflect criticism from her opponents (particularly Dino Rossi) that this bill doesn't improve economic security for small business owners.

Senator Maria Cantwell, for her part, took to the Senate floor to thank Banking Committee Chairman Chris Dodd of Connecticut (who isn't seeking reelection) for addressing her concerns about derivatives by throwing his support behind an amendment she authored that imposes severe penalties for evading the clearing and exchange trading requirements for derivatives.

(Cantwell recently sought and received an opinion from the Chairman of the Commodity Futures Trading Commission, Gary Gensler, who assured her that he believed a significant portion of the derivatives market would be subject to the mandatory clearing requirement present in the final version of the legislation. Following the receipt of this letter, Cantwell announced her support for H.R. 4173.)

"For the first time, over-the-counter derivatives will have to be exchange traded, which means there will be transparency," Cantwell declared. "It’s the first time over-the-counter derivatives will have to be cleared, which means a third party will have to validate whether there is real money behind these transactions."

Oregon Senator Jeff Merkley likewise touted his own contribution to the bill:
I am pleased that the final bill includes the Merkley-Levin amendment that will ban high-risk trading inside the banks and put an end to conflicts of interest, where giants like Goldman Sachs bet against the very securities they were selling to their customers. This provision will encourage banks to return to the days where their main focus was lending. I can’t thank Senator Carl Levin enough for his tireless work to ensure that our banks won’t engage in high-risk trading and put our entire financial system at risk.
The bill arguably addresses most of the symptoms wrought on our economy by the financial meltdown, but it stops short of taking aim at the causes. Still, incremental progress is better than no progress at all.

H.R. 4173 sets up several new entities with long names intended to protect consumers and force big banks to be more responsible. These entities are:
  • Consumer Financial Protection Bureau. Housed within the Fed, this agency will have the authority to create, examine and enforce regulations for large financial institutions, including banks, credit unions, and lenders. It will be headed by an independent administrator appointed by the President and confirmed by the Senate; its budget, however, will come from the Fed.
  • Financial Stability Oversight Council. This body will be chaired by the Treasury Secretary, with most of its other voting members coming from Alphabet Soup Land. Er, sorry, I meant these eight agencies:
    1. Federal Reserve Board,
    2. Securities & Exchange Commission,
    3. Commodity Futures Trading Commission,
    4. Federal Deposit Insurance Corporation,
    5. National Credit Union Administration,
    6. Office of the Comptroller of the Currency,
    7. Federal Housing Finance Agency,
    8. and the new Consumer Financial Protection Bureau.
    The tenth member will be an independent appointee with insurance expertise. Basically, it has the ability to make recommendations to the Federal Reserve, require nonbank financial companies to stipulate to Federal Reserve oversight, and approve Federal Reserve decisions. In my opinion, it looks more powerful on paper than it will be in action.
  • Office of Minority and Women Inclusion. As the name suggests, this agency will work to ensure that regulators aren't just a bunch of white guys. It will also provide assistance to businesses in the financial sector that are owned by women or minorities.
  • Office of Credit Ratings. This will be part of the Securities & Exchange Commission, responsible for watchdogging the ten Nationally Recognized Statistical Ratings Organizations currently recognized by the SEC. "NRSRO" is basically a ridiculously long bit of jargon that describes what Standard & Poor's, Moody's, and Fitch's are.
  • Federal Insurance Office. This agency will gather information about the insurance industry for the Department of the Treasury. It doesn't appear that it will have any kind of regulatory power.
The legislation also shuts down the Office of Thrift Supervision, which is widely considered to be dysfunctional. Its authority will be transferred to the Office of the Comptroller of the Currency.

This post would get ridiculously long if I tried to describe the various rules and regulations that are in the bill. There are a lot of them. Some are vague, while others are more specific. Some seem well-intentioned but toothless.

For instance, one provision says shareholders have the right to vote on executive pay packages. But it also says that CEOs and boards have the right to ignore (or continue ignoring) such votes, which will only be non-binding.

Other parts of the bill are designed simply to create less chaos in the event of a future catastrophe. For example, the "funeral arrangements" provision says that really, really big financial companies must regularly submit plans that detail how they will quickly and efficiently wind down their operations if they go under. Companies that refuse or neglect to turn in satisfactory plans will be subject to growth and activity restrictions and they may have to divest certain assets.

H.R. 4173, as a whole, is unquestionably a response to the 2008 financial meltdown. Whether it will successfully prevent or lessen the severity of future meltdowns remains to be seen. The main question I have after studying this bill is, why aren't we further along than this already? Seriously.

Democrats could have saved the country a whole lot of trouble by writing many of the provisions that are in H.R. 4173 into the legislation that created the Troubled Asset Relief Program (TARP), otherwise known as the bank bailout. But instead, they mostly voted to write a blank check to Wall Street.

This bill should make Wall Street more accountable. But it's a beginning, not an end. More work is needed. For instance, Congress needs to restore Glass-Steagall, to rebuild the firewall between commercial and investment banking that was unwisely torn down at the end of the 1990s. That didn't make it into H.R. 4173.

It's telling that banks and bank holding companies have donated an average of thirty five percent more to the campaigns of senators who voted against H.R. 4173 (in other words, Republicans, because Russ Feingold was the only Democrat voting against, and he wanted the bill to go even farther).

Bank lobbyists may have failed to stop the bill, but they did succeed in significantly watering it down in many ways. We are reminded that if we ever want a Congress that is committed to putting the public interest first, we're going to need to reduce corruption by ending money's toxic grip on our politics.


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