Congress certainly hasn’t rushed to pass financial reform. It’s been nearly two years since the financial implosion that came close to throwing the world into a global recession. Still, it took an all-night negotiations marathon that finally ended after 5 a.m. Friday to push a bill through a House-Senate conference committee that will help reduce — but not clearly prevent — a similar crisis in the future.
The bill reconciled separate Senate and House versions in each chamber’s conference vote, but did so only on affirmative votes by their Democratic majorities. The Party of No uniformly opposed the final bill. Senate conferees passed the measure by a 7-5 margin; House conferees by 20-11.
If the bill is ultimately adopted by the Senate, where filibuster-prone Republicans could still block it, it would do some very good things. Among the foremost measures, it would restrict market trading by banks for their own benefit, and would require them to segregate their and their parent companies’ restricted trading activities under separately funded subsidiaries.
To protect average consumers, it would create a powerful, independent Consumer Financial Protection Agency, to be housed under the Federal Reserve. The agency would be headed by a single director, and authorized to make and enforce its own rules over a raft of often abusive consumer credit industries that presently are loosely regulated, if at all, by a variety of federal agencies and state governments.
The banking lobby had fiercely opposed the so-called Volcker Rule. The strict interpretation of the rule would have banned banks from using their own money to gamble in often lucrative derivatives trading, and would have forced banks to sell off their hedge funds and private equity groups.
Lobbyists made some inroads with members of congress, but not as much as was originally feared. Though the final bill would allow banks to continue trading under segregated subsidiaries, it would limit their investments in hedge funds and private equity funds to no more than three percent of a fund’s capital, no more than three percent of a bank’s tangible equity.
Critics contend that’s not an onerous restriction, because banks usually do not invest more than three percent in such funds. They also argue that the bill doesn’t address the “too-big-too-fail” problem posed by the financial titans. Yet the Volcker Rule’s provisions limiting trading in banks that have federal insured deposits is likely to mitigate the too-big-too-fail risks to the public. The bill would, moreover, end banks’ use of low-cost funds provided to insured depositories to subsidize high-risk investments.
That reform would not represent a return to the bright line division between commercial banks and investment banks that used to apply under the Glass-Steagall Act, which was repealed a decade ago. But it would help differentiate the trading activity of commercial banks from the big Wall Street firms, like Goldman Sachs and Morgan Stanley, which traditionally trade heavily out of their own accounts.
Banks, to be sure, are bound to seek new investment vehicles to evade the new rules, but the new bill at least makes a provision that is intended to follow-up on the impact of the bill among financial advisers stock brokers. It would require the Securities and Exchange Commission to report within six months of the bill’s enactment on the effectiveness of rules requiring financial advisers to act in their clients’ best interest, and to divulge the benefits and compensation they receive from investments they recommend. The SEC may, and should, require similar higher fiduciary standards for stock brokers.
The Consumer Financial Protection Agency will broadly benefit American consumers in a range of areas. It will be able to write and enforce fair and transparent rules and maximum fees for most banks, credit unions, credit-card companies, pay-day lenders, mortgage lenders and student loan companies.
Though the auto-industry won an unfair exemption from inclusion under the agency’s umbrella, it will also be subject to more scrutiny for abusive and bait-and-swap credit tactics.
The legislation is by no means complete. It retreats, for example, from regulation of equity-indexed annuities, which many seniors are conned into buying through deceptive marketing techniques. But it does represent a huge leap forward in restricting the banking and credit industries worst abuses. If just a few Republicans will acknowledge its long-sought value, it should become law.