By a vote of 60-39, the Senate just passed the Wall Street reform conference report, and now send it on it's way to the president's desk to become law. What's in it? Here's a thumbnail sketch of the bigger provisions:
- Derivatives Exchanges and Clearing: Forces almost all derivatives trading onto exchanges and through clearinghouses, with narrow exemptions for non-financial end users.
- Derivatives Spin-Off: Forces banks to spin-off some derivatives trading activity (commodities, energy, metals, agriculture, equities and below-investment-grade credit default swaps) but keep trading related to interest rate swaps, foreign exchange swaps, credit, gold and silver, investment-grade credit default swaps and "any transaction used to hedge risk."
- Volcker Rule: Implements a stronger ban proposed by Sens. Carl Levin (D-MI) and Jeff Merkley (D-OR), but with an exemption sought by Sen. Scott Brown (R-MA) that allows banks to invest up to three percent of their Tier 1 capital in risky hedge funds and private equity firms.
- Consumer Protection Agency: A Consumer Financial Protection Bureau, housed within the Federal Reserve, with an independent director and rule-writing authority. It could be overruled by a majority vote of the Financial Stability Oversight Council, which is composed of bank regulators..
- Auto Dealer Exemption: Exempts auto dealers from oversight by the new consumer regulator.
- Resolution Fund: Includes resolution authority funded by an after-the-fact assessment on large financial institutions. Any extra money needed to unwind a firm can be fronted by the Treasury Department.
The bill, as Sen. Ted Kaufman eloquently argues is a "vast improvement over the existing regulatory structure," and is stronger than many observers ever thought would happen (thank you, Bill Halter, for a big part of that). Kaufman goes on:
Ultimately, given the make-up of the Senate and the requirement of 60 votes, this was the best bill that could pass. For those who wish the bill was stronger, let there be no confusion about where the blame lies. It is because almost every Senator on the other side of the aisle did everything they could to stall, delay and oppose Wall Street reform.
To be sure, the bill that has come out of conference includes some extremely important reforms. It establishes an independent Consumer Financial Protection Bureau (CFPB) with strong and autonomous rulemaking authority and the ability to enforce those rules for large banks and nonbanking entities like payday lenders and mortgage finance companies. In addition, it requires electronic trading and centralized clearing of standardized over-the-counter derivatives contracts as well as more robust collateral and margin requirements. The bill's inclusion of the Kanjorski provision will give regulators the explicit authority to break up megabanks that pose a "grave threat" to financial stability. And I was pleased that the bill includes a provision I helped develop to give regulators enhanced tools and powers to pursue financial fraud.
Through the Collins provision, the bill also establishes minimum leverage and risk-based capital requirements for bank holding companies and systemically risky non-bank institutions that are at least as stringent as those that apply to insured depository institutions. In light of the failures of past international capital accords, this requirement will set a much-needed floor on how low capital can drop in the upcoming Basel III negotiations on capital requirements. It will also ensure that the capital base of megabanks is not adulterated with debt that masquerades as equity capital.
For those things, the new law should be lauded. But as Kaufman also argues, this won't be the end of financial reform. Kaufman points out the heavy burden it places on regulators, a body that hasn't had any muscle to flex for decades. Those regulators are given the authority to deal with too big to fail institutions in lieu of any "statutory walls," such as Glass-Steagall, to force the issue.
In this Congress, it's a major achievement--any comprehensive legislation is. But it needs to be viewed as a very good start to reforming Wall Street, and not the be all and end all Wall Street reform.