US LAWMAKERS last night passed a landmark financial reform bill allowing the broadest overhaul of rules governing America’s largest financial institutions since the 1930s.
The Senate approved the bill by a 60 to 39 vote last night and will now send it to President Barack Obama to sign into law next week.
The bill, which ushers in a raft of restrictions on banks, is intended to avert a repeat of the 2008 crisis that brought the world economy to the brink of collapse.
The bill will be called the Dodd-Frank Act after its main leaders, senate banking committee chairman Chris Dodd, a Democrat, and Republican Barney Frank.
Obama said the new regulation would give the strongest consumer protection in history and meant the American people “will never again be asked to foot the bill for Wall Street’s mistakes.”
Federal Reserve chairman Ben Bernanke said the bill was “a welcome and far-reaching step toward preventing a replay of the recent financial crisis”
Institutions like Bank of America Merrill Lynch and Goldman Sachs will be barred from
proprietary trading and allowed only to make minimum investments in private equity and hedge funds.
Banking giants will also be forced to shed some of their highly profitable derivatives business or face the risk of losing access to emergency funds held by the Federal Reserve. They can, however, continue to trade big volume instruments such as foreign exchange and interest rate swaps.
The bill also introduces new rules on credit cards and mortgages, with the goal of establishing a new consumer protection bureau to oversee the regulation and shield customers from exposure to risky products.
More powers will be handed to the Federal Reserve once the bill is signed by Obama, allowing it to supervise every bank on Wall Street and granting it the ability to pull apart any bank that it deems a risk.
Credit rating agencies will also come under the spotlight. Fitch, Moody’s and Standard & Poor’s will now have to assume more responsibility for their ratings and will face potential legal action if they fail to do so.
WINNERS AND LOSERS | WALL STREET SHAKE-UP
CREDIT RATING AGENCIES – LOSE
Rating agencies, such as Moody’s, Standard & Poor’s and Fitch could be sued if they “recklessly” fail to review key information in developing a rating. Credit ratings will also be removed from federal regulators rules to reduce reliance on ratings. The SEC will now start a two-year probe into how to reduce conflicts of interest for agencies who are paid by the companies issuing the securities they rate.
SMALL BANKS – WIN
Little will change for smaller banks. The Federal Reserve will continue supervising them.
CONSUMERS – WIN
There will be new rules to protect consumers from risky financial products. These could only be overturned by banking regulators if they believe the rules could threaten the financial system or banks’ deposits. The consumer regulator will be able to write its own rules for a slew of products such as mortgages and credit cards and enforce those rules.
LARGE BANKS – LOSE
Large financial firms such as Bank of America and Goldman Sachs will be prohibited from proprietary trading and only be allowed to make minimum investments in hedge funds and private equity funds. They will also face tougher standards in what qualifies for the capital they are required to set aside to protect against potential losses. Banks such as Goldman and JPMorgan Chase will be forced to spin off some of their profitable derivatives business or risk losing access to the Federal Reserve’s emergency funds. The firms’ financial products such as mortgages and credit cards will be subjected to new rules from a newly created bureau designed to protect customers from risky products. Most derivatives trade will be forced onto exchanges or handled through clearinghouses, in an attempt to limit the effect that large, risky trades can have on the economy – potentially curbing banks profits.
CFTC/SEC – WIN
The CFTC and SEC will gain new authority to regulate the $615 trillion over-the-counter derivatives market.
US FEDERAL RESERVE – WIN
Gains powers to supervise systemically important financial firms. Retains authority to supervise banks of all sizes. Will be part of a “risk council” that will have authority to monitor risk in the financial system and decide whether a large complex company needs to divest assets.
Becomes home for the new Consumer Financial Protection Bureau giving it power to appeal the consumer protection bureau’s rules if it thinks they undermine the stability of the financial system or banks’ deposits.
PRIVATE POOLS OF CAPITAL – WIN
Advisers to hedge funds and private equity funds with more than $150m in assets will be required to register with the SEC. Venture capital funds will be exempt.
AUTO DEALERS – WIN
Auto dealers that do financing will be exempt from oversight by the new consumer bureau and stay within the jurisdiction of the Federal Trade Commission.
LAW FIRMS – WIN
Regulators like the Commodity Futures Trading Commission and Securities and Exchange Commission will have scores of rules to write in coming months to implement the legislation, meaning lots of billable hours for law firms and consultants advising clients on how to respond to proposed rules.
CLEARINGHOUSES – WIN
Derivatives clearinghouses will be able to borrow in emergencies from the Federal Reserve, as long as the systemic risk council, a majority of Fed governors and the Treasury Secretary decide it is necessary.
INVESTORS/SHAREHOLDERS – WIN
Publicly-traded companies will be required to ask shareholders whether they want a non-binding vote on executive pay annually, once every two years, or once every three years. The SEC will have the authority to give shareholders an easier and cheaper way to nominate corporate board directors.