WAHT is being billed by proponents as the biggest shake-up of Wall Street since the great depression could go through the senate this week as politicians desperately haggle over the future of the US financial system.
A series of new measures promise to reform many Wall Street practices. Proposals for the new bill include:
• Setting up an early warning system to watch out for problems in the financial system.
• Devising a template to liquidate large failing firms to prevent a repeat of the chaos caused by the collapse of Lehman Brothers. This is a key change which would banish the “two big to fail” concept.
• Bringing in new rules on the trading of derivatives, the complex financial products that helped propagate the financial crisis.
• Building a Chinese wall between credit rating agencies and investment banks to ensure there is no bias on the ratings given to financial products.
• Creating a new consumer protection agency.
• Establishing an independent bureau within the Federal Reserve to make sure banks comply.
• Enhancing the powers of the Federal Trade Commission, a body designed to ensure market competition.
Further amendments are being discussed in light of the Greek crisis.
President Obama claimed the new rules will help to “protect folks on Main Street” as well as shield the economy from the threat of another financial meltdown.
Q&A: THE LOWDOWN ON WALL STREET REFORM
Q. WHEN WOULD THE NEW RULES COME INTO PLAY?
A. Democrats and Republicans are still haggling over the details but a vote could come before the US senate by the end of this week.
Q. DO THE TWO SIDES AGREE ON WHAT ACTION TO TAKE?
A. The Republicans broadly agree with Democrat plans to tighten up regulation on Wall Street but they are arguing for some of the more stringent proposals to be rolled back.
Q. WHY ARE RATINGS AGENCIES BEING TARGETED?
A. The relationship between credit rating agencies and banks has come under scrutiny after the New York Attorney General Andrew Cuomo launched an investigation into whether they could be under pressure from, or in collusion with, investment banks, costing investors.
Q. SO WHAT WILL HAPPEN TO THEM?
A. The role of credit agencies will remain unchanged. However, crucially, banks will lose the power to choose which agencies rate their products. This would, in theory at least, remove the possibility of bankers pressuring agencies to boost the cost of products by providing positive ratings.
Q. WHAT ABOUT DERIVATIVES? WHAT WILL HAPPEN?
A. Derivatives allow investors to bet on the future direction of an asset. The process is held responsible by some for exacerbating the financial crisis and Obama is determined to curb the previously unregulated trade in these complex financial products.
Q. HOW HAS THIS GONE DOWN WITH BANKERS?
A. Like the proverbial lead balloon. The curbs on derivatives trading has variously been called “shocking,” “ignorant,” “dangerous” and “sheer stupidity”, with banks furious that their earnings will be clipped by the new bill.
Q. WILL THE BILL BE PASSED BY THE SENATORS?
A. Signs are that a deal will be struck but there is a lot to play for – there is a must-win congressional election in November and reforming Wall Street is a key aspect of Obama’s campaign.
Q. WHO WILL POLICE THE NEW RULES IF THE BILL IS PASSED?
A. A new independent bureau will be established to make sure banks are complying with the regulation.