Bill Passed in Senate Broadly Expands Oversight of Wall St./How the Finance Bill Affects Consumers/Reconciliation for 2 Financial Overhaul Bills

Bill Passed in Senate Broadly Expands Oversight of Wall St.
By DAVID M. HERSZENHORN
Copyright by The New York Times
Published: May 20, 2010
http://www.nytimes.com/2010/05/21/business/21regulate.html?th&emc=th


WASHINGTON — The Senate on Thursday approved a far-reaching financial regulatory bill, putting Congress on the brink of approving a broad expansion of government oversight of the increasingly complex banking system and financial markets.

Senator Richard Durbin, the Democrat from Illinois, right, hugged Senator Blanche Lincoln, the Democrat from Arkansas, after a financial regulatory bill passed.

The legislation is intended to prevent a repeat of the 2008 crisis, but also reshapes the role of numerous federal agencies and vastly empowers the Federal Reserve in an attempt to predict and contain future debacles.

The vote was 59 to 39, with four Republicans joining the Democratic majority in favor of the bill. Two Democrats opposed the measure, saying it was still not tough enough.

Democratic Congressional leaders and the Obama administration must now work to combine the Senate measure with a version approved by the House in December, a process that is expected to take several weeks.

While there are important differences — notably a Senate provision that would force big banks to spin off some of their most lucrative derivatives business into separate subsidiaries — the bills are broadly similar, and it is virtually certain that Congress will adopt the most sweeping regulatory overhaul since the aftermath of the Great Depression.

“It’s a choice between learning from the mistakes of the past or letting it happen again,” the majority leader, Harry Reid of Nevada, said after the vote. “For those who wanted to protect Wall Street, it didn’t work.”

The bill seeks to curb abusive lending, particularly in the mortgage industry, and to ensure that troubled companies, no matter how big or complex, can be liquidated at no cost to taxpayers. And it would create a “financial stability oversight council” to coordinate efforts to identify risks to the financial system. It would also establish new rules on the trading of derivatives and require hedge funds and most other private equity companies to register for regulation with the Securities and Exchange Commission.

Passage of the bill would be a signature achievement for the White House, nearly on par with the recently enacted health care law. President Obama, speaking in the Rose Garden on Thursday afternoon, declared victory over the financial industry and “hordes of lobbyists” that he said had tried to kill the legislation.

“The recession we’re emerging from was primarily caused by a lack of responsibility and accountability from Wall Street to Washington,” Mr. Obama said, adding, “That’s why I made passage of Wall Street reform one of my top priorities as president, so that a crisis like this does not happen again.”

The president also signaled that he would take a strong hand in developing the final bill, which could mean changes to the restrictive derivatives provisions the Senate measure includes and Wall Street opposes. It is also likely that the administration will try to remove an exemption in the House bill that would shield auto dealers from oversight by a new consumer protection agency. Earlier, Mr. Obama had criticized the provision as a “special loophole” that would hurt car buyers.

As the Senate neared a final vote, Senator Sam Brownback, Republican of Kansas, withdrew an amendment to put a similar exemption for auto dealers into the Senate bill.

Mr. Brownback’s move had the effect of killing an amendment by Senators Jeff Merkley, Democrat of Oregon, and Carl Levin, Democrat of Michigan, to tighten language barring banks from proprietary trading, or playing the markets with their own money — a restriction generally known as the Volcker rule for the former Fed chairman Paul A. Volcker, who proposed the idea. Congressional Republican leaders, adopting an election-year strategy of opposing initiatives supported by the Obama administration, voiced loud criticism of the legislation while trying to insist that they still wanted tougher policing of Wall Street.

But while Republicans criticized the bill in mostly political terms, arguing that it was an example of Democrats’ trying to expand the scope of government, some experts have warned that the bill, by focusing too much on the causes of a past crisis, still leaves the financial system vulnerable to a major collapse.

The Senate bill, sponsored primarily by Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, would seek to curb abusive lending by creating a powerful Bureau of Consumer Protection within the Federal Reserve to oversee nearly all consumer financial products.

In response to the huge bailouts in 2008, the bill seeks to ensure that troubled companies, no matter how big or complex, can be liquidated at no cost to taxpayers. It would empower regulators to seize failing companies, break them apart and sell off the assets, potentially wiping out shareholders and creditors.

To coordinate efforts to identify risks to the financial system, the bill would create a “financial stability oversight council” composed of the Treasury secretary, the chairman of the Federal Reserve, the comptroller of the currency, the director of the new consumer financial protection bureau, the heads of the Securities and Exchange Commission and the Federal Deposit Insurance Corporation, the director of the Federal Housing Finance Agency and an independent appointee of the president.

The bill would touch virtually every aspect of the financial industry, imposing, for instance, a thicket of rules for the trading of derivatives, the complex instruments at the center of the 2008 crisis.

With limited exceptions, derivatives would have to be traded on a public exchange and cleared through a third party.

And, under a provision written by Senator Blanche L. Lincoln, Democrat of Arkansas, some of the biggest banks would be forced to spin off their trading in swaps, the most lucrative part of the derivatives business, into separate subsidiaries, or be denied access to the Fed’s emergency lending window.

The banks oppose that provision, and the administration has also said that it sees no benefit.

Concern about the derivatives provisions also led Senator Maria Cantwell, Democrat of Washington, to vote against the bill, saying it still included a dangerous loophole that would undermine efforts to regulate derivative trades. Senator Russ Feingold of Wisconsin was the other Democrat to oppose the measure.

The four Republicans to support the bill were Senators Susan Collins and Olympia J. Snowe of Maine; Scott Brown, the freshman from Massachusetts; and Charles E. Grassley of Iowa, who is up for re-election this year.

Among the differences between the House and Senate bills is the inclusion in the House measure of a $150 billion fund, to be financed by a fee on big banks, to help pay for liquidation of failing financial companies.

The administration opposes the fund, which it says it believes could hamper its ability to deal with a more costly collapse of a financial company. Republicans demanded that a similar $50 billion fund be removed from the Senate bill because they said it would encourage future bailouts of failed financial companies.

There are numerous other differences. For instance, the House bill addresses the consumer protection goals by establishing a stand-alone agency that would be subject to annual budget appropriations by Congress. The Senate bill establishes its consumer protection bureau within the Federal Reserve, limiting future Congressional oversight.

Lawmakers said that the bills would be reconciled in a formal conference proceeding, possibly televised.

Edward Wyatt contributed reporting.


How the Finance Bill Affects Consumers
By RON LIEBER
Copyright by The New York Times
Published: May 21, 2010
http://www.nytimes.com/2010/05/22/your-money/22money.html?hp


For consumers trying to figure out what the financial overhaul bill means for them, the legislation the Senate passed Thursday offers some tantalizing possibilities.

Merchants might offer more discounts to people who pay cash. You could get a free credit score every time a lender or landlord penalizes you with a high interest rate or rejects your application because your score is not up to snuff. Many mortgage prepayment penalties would go away. And there will be a consumer financial protection agency, despite many efforts to kill it off.

But some of the measures that could have the most impact on consumers are not in the House version of the bill that passed in December. So we will not know which new rules will exist in what form until the two sides haggle in conference and produce a final bill.

One last-minute Senate addition would lower the fees that merchants pay to process many debit card transactions. If banks lose revenue as a result, they could make up for it by adding fees to checking accounts or cutting back on rewards programs. Retailers say that once card costs fall, they will hire more workers and hold the line on prices. There is a fair bit of disagreement about who has the better argument.

It will not be clear until there is a final bill — and perhaps not for years afterward — how much money the measures will put in your pocket or whether they will keep it from being picked. But the basic outlines are clear, so here are the areas to watch as a final bill emerges.

DEBIT AND CREDIT CARDS The Senate bill contains an amendment with provisions that could affect how you use your credit card. You have probably encountered those irritating hand-written signs that forbid card use unless you’re spending more than $10 or so, even though stores are generally not supposed to do this. The bill would allow such minimums, as long as stores were not setting minimums for, say, Bank of America’s credit card but not Chase’s. Merchants would also not be allowed to set different credit card spending minimums for, say, a Visa and MasterCard.

However, stores would be able to offer discounts based on what card a customer was using. So someone with an American Express card, which often costs the merchant more than other cards, might pay the full sticker price of an item that costs $100, while Visa and MasterCard holders could get a $1 discount.

The bill specifies that cash discounts are acceptable, as are lower prices for people who use debit cards. The stores could not, however, charge one price for Visa debit cards from one bank and another for Visa debit cards from a different bank.

Why does the bill include this provision? Because it also orders the Federal Reserve to set rules that would lead to lower fees for merchants who accept debit cards. A crucial part of this provision is the fact that merchants would pay those lower fees only to banks with more than $10 billion in assets. Smaller community banks and credit unions would still get the same amount of merchant fee income that they are getting now. That might have led a merchant to accept the less-costly Visa cards while turning away the more expensive ones (or setting minimum purchase amounts for the pricier ones).

You would think that small banks would like having a revenue advantage. They don’t think a two-tier fee system can last, though, and figure that big banks, which produce a large portion of the revenue for Visa and MasterCard, would pressure the two companies into lowering the fees that the small banks would collect as well. So they are lining up with the big banks to oppose the bill and keep the higher fees intact.

Dan O’Malley, the chief executive of PerkStreet Financial, is trying to build an online banking service around giving customers rewards for using their debit cards. Those merchant fees finance his perks, and if those fees fall, he’s got problems. Most banks would have their own challenges if they were to lose out on a big chunk of fee revenue.

“It becomes a gamble,” Mr. O’Malley said. “Monthly checking-account fees will come back. And maybe retail prices will come down, but nobody knows.”

Indeed, the merchants who have been pushing for lower fees for years argue that the reduction would benefit consumers, since they would then pay lower retail prices.

Somehow I doubt that merchants would throw a parade and immediately cut all prices by half a percentage point on every item on the day this bill goes into effect, if it comes to pass. Maybe prices won’t go up as much as they might have otherwise. But it will be hard for merchants to point to the vague idea of less-steep increases and satisfy angry customers who may suddenly be paying $10 a month for a checking account or earning half as many debit card rewards because their bank can’t afford to be as generous anymore.

“This is an incredible con job,” MasterCard’s general counsel, Noah J. Hanft, said. “Under the guise of helping small business, this is just a shrewd and cynical effort that ultimately harms consumers.”

That is the case he will make to the Congressional panel that will reconcile the two bills. The provisions are not in the House bill, and it’s not clear if House members will be willing to accept any of them.

MORTGAGES The Senate bill outlines three new changes, many of which echo the House bill.

First, mortgage lenders would face restrictions on when they can charge borrowers a penalty for paying off their loan before the term of the mortgage is up. They wouldn’t be able to charge pre-payment penalties at all for mortgages that have balloon payments or for those that allow people to make payments so low that the mortgage balance rises instead of falls (so-called negative amortization loans), among others. For more standard plain-vanilla mortgages, pre-payment penalties would only be allowed in the first three years.

Second, the bill forbids anyone who sets up mortgages for customers from accepting compensation that would vary depending on the loan type. This is intended to protect consumers from some of the shenanigans that went on several years ago, when banks paid mortgage brokers extra money for putting customers in loans with high fees and lousy terms.

Finally, the bill requires banks to consider applicants’ income, assets and credit history before making a loan. How quaint, right? It would be funny if it wasn’t so pathetic that this even needed to be in here.

CREDIT SCORES In an issue that is not addressed in the House bill, the Senate bill, through an amendment, requires anyone who uses a credit score as a reason for taking an adverse action against a consumer to give the score to that person for free. So if you don’t get the best mortgage, credit card or auto loan interest rate, the lowest insurance premium or the apartment you wanted, you would be able to see the grade that hurt you. Normally, this can cost you about $15.

Lenders or landlords will have to give you the score they used, which will usually be a FICO credit score. I had hoped that Congress would give consumers free credit scores every year to go along with the three free credit reports they can get, but it didn’t happen.

BROKERS AND FIDUCIARY DUTY Senators had no luck inserting an amendment into their bill that would require brokers to act in clients’ best interests. Currently, many of these professionals need only to recommend investments that are merely suitable. The House bill includes the “best interests” requirement, and if it prevails, many more stockbrokers — and insurance salesmen pushing certain kinds of expensive annuities — would have to meet a higher standard.

The House’s so-called fiduciary standard has been the subject of debate for a long time, and the insurance industry will fight fiercely in the negotiations to keep it from becoming law.

NEW CONSUMER AGENCY Both bills call for the creation of a consumer financial protection agency. The agency would oversee many consumer loans and work to make the products more transparent.

It’s hard to predict exactly how much power the agency will ultimately have and how aggressive it will be as it attempts to set new rules. At the very least, it will give consumers someplace else to go when things go awry.

Lest we forget, the whole point of this bill is to keep something like what went on in the latter half of the last decade from ever happening again. Perhaps the new cops on the beat will sound the alarms sooner when we inevitably go off the rails again in the years to come.



Reconciliation for 2 Financial Overhaul Bills
By SEWELL CHAN
Copyright by The New York Times
Published: May 21, 2010
http://www.nytimes.com/2010/05/22/business/22regulate.html?th&emc=th


WASHINGTON — Fresh off Senate approval of the overhaul of the nation’s financial regulations, the Obama administration quickly moved on Friday to shape the final version of the bill.

In three areas, consumer protection, restricting banks from using their own money to make bets in the market, and dealing with failing institutions that threaten the financial system, administration officials suggested that they were inclined to favor provisions in the Senate version over those of the House bill, which was passed in December.

But the fate of a Senate provision that could require banks to spin off their lucrative derivatives trading desks is in fierce contention. The author of the provision, Senator Blanche Lincoln, Democrat of Arkansas, has so far fended off attempts to water it down, but financial institutions are preparing to lobby against it over the next several weeks. Treasury officials have privately expressed strong reservations about the provision.

Senator Christopher J. Dodd, chairman of the Banking Committee, and Representative Barney Frank, chairman of the Financial Services Committee, who will shepherd the reconciliation process, said after meeting with President Obama at the White House that they were confident that a final bill could be delivered for his signature by Independence Day.

“This is one of those rare occasions when the two bills really are very close to each other,” said Mr. Dodd, a Connecticut Democrat. “There’s not a great deal of difference. We need to take the best parts of both bills and marry them together and present our colleagues in both chambers with our final product.”

Mr. Frank, a Massachusetts Democrat, promised a transparent process for reconciling the two bills. “It will be conducted, the formal parts, in public,” he said. “That means that no agreements reached, no compromises which obviously are being discussed, will be made part of anything without being publicly presented and voted on and discussed.”

Timothy F. Geithner, the Treasury secretary, said in an interview, “The president wants us to get this right and make sure that this is the strongest possible bill, but he wants us to get it done in a responsible way that preserves the right balance.”

Mr. Geithner was part of the meeting at the White House, along with Lawrence H. Summers, director of the National Economic Council.

In another sign of the unusual political dynamics that have accompanied the monthslong debate over the regulatory overhaul, there were calls from both the left and the right for the conference process to be as open as possible.

“The battle now moves to conference, where the big banks will look to weaken or kill the bill behind closed doors,” said Heather Booth, executive director of Americans for Financial Reform, a coalition of liberal advocacy groups. “We cannot and will not allow this to happen.”

The House Republican leader, Representative John A. Boehner of Ohio, made a similar point. “This subject is too important and affects too much of our economy to be written in its final stages by a select few Democrats and lobbyists behind closed doors,” he wrote in a letter to Speaker Nancy Pelosi.

The process of reconciling the legislation will most likely be undertaken with the aim of preserving the fragile coalition that made its passage in the Senate possible.

The House bill would create a freestanding Consumer Financial Protection Agency, financed through a mix of sources, while the Senate version would create a Bureau of Consumer Financial Protection within the Federal Reserve, with a director appointed by the president and its budget coming from within the Fed. Momentum appears to be growing for the Senate approach.

The two bills differ on the extent to which the new agency’s rules would override consumer standards promulgated by states, known as pre-emption. Most banks prefer the Senate version, which would allow greater pre-emption in certain instances.

The House bill would exempt auto dealers from the reach of the new consumer agency; the Senate bill would not. President Obama has been outspoken in arguing against the exemption.

The two bills differ on what has become known as the Volcker Rule — a ban on banks making market bets with their own money, as opposed to trading on behalf of their clients.

The House version gives regulators the discretion to crack down on such activity, known as proprietary trading. The Senate version directs regulators to ban such proprietary trading after a period of study.

The Treasury Department largely drafted the Senate version of the Volcker Rule, and is expected to advocate for it.

The bills also differ in their approach to creating a so-called resolution authority, a process for the government to seize and dismantle a systemically important institution in a way that is aimed at preventing financial chaos.

While both bills call for a process modeled on the approach the Federal Deposit Insurance Corporation uses to take over failing banks, the House bill calls for huge financial companies to pay into a $150 billion fund. The Senate removed the fund, which had become an object of much contention. Either way, the industry would have to pay the costs of resolution.

In addition, the Senate version makes it clear that a company could not survive the process — that resolution is “hospice, not convalescence,” said John Dearie, executive vice president for policy at the Financial Services Forum, which prefers the Senate approach.

The administration is seeking to remove two requirements in the Senate version: that a failing company must pass through a review by a special panel of bankruptcy judges, and that F.D.I.C. loan guarantees obtain Congressional approval.

The Lincoln provision is expected to draw the most fire in coming weeks. Sheila C. Bair, chairwoman of the F.D.I.C., and Ben S. Bernanke, the Federal Reserve chairman, have criticized the provision, asserting that it could destabilize the financial system. Administration officials say that the provision would block derivatives-clearing organizations from receiving liquidity assistance in the event of a crisis, undermining a major aim of the measure.

Mrs. Lincoln has so far stood firm behind her provision, but several observers said its fate would almost certainly not be decided until after June 8, when she faces an aggressive challenger, Bill Halter, in a Democratic primary runoff.

Other substantial differences exist between the two bills.

While both provide for increased oversight of the Fed by the Government Accountability Office, the Senate version would continue to exempt interest rate decisions from scrutiny.

The Senate bill includes a provision for proxy access, which would make it easier for investors to nominate candidates for corporate boards using company ballots.

And it would limit interchange fees, which retailers pay to banks when customers swipe credit or debit cards.

The House version does not contain either provision.

Jackie Calmes contributed reporting.