July 23, 2010
With a broad smile and the stroke of a pen, President Barack Obama capped a contentious 18-month struggle and signed into law the broadest revamp of financial regulation since the Great Depression.
“Passing this bill was no easy task. To get there, we had to overcome the furious lobbying of an array of powerful interest groups and a partisan minority determined to block change,” Obama said in a pre-signing speech, surrounded by cheering congressional leaders and administration members.
Alternating between hitting Wall Street and acknowledging its economic importance, the president said that the historic Restoring American Financial Stability Act of 2010 seeks to strike a balance that would protect consumers while allowing the vital financial sector to prosper.
“The fact is the financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate. This reform will foster innovation, not hamper it. It is designed to make sure everybody follows the same set of rules,” he said. “Unless your business model depends on cutting corners or bilking customers, you’ve got nothing to fear from reform.”
The signing marked the third major legislative accomplishment for Obama, after an $800 billion stimulus and tax-cut package and a regulatory revamp of the health care sector. Still, the president has slumped in the opinion polls, dragged down by a sluggish economy. Polls also suggest that the broader public is ambivalent about the new measure.
To combat that, Obama and congressional Democrats went to extremes to highlight all the consumer provisions in the legislation. There are numerous measures to combat predatory lending, and the president invited borrower Robin Fox of Rome, Ga., to the speech. She’d been hit with unexpected interest rate increases on a credit card balance. “With this law, unfair rate hikes, like the one that hit Robin, will end for good,” Obama said.
Underscoring the historic nature of the legislation, which updates many rules that date to the 1930s, the televised signing ceremony wasn’t at the White House but at the Ronald Reagan Building, in a large auditorium where about 400 invited guests could bask in the accomplishment.
The legislation seeks to fix much of what went wrong in the lead-up to the nation’s deep financial crisis. It gives regulators the power to dissolve large, interconnected financial institutions and allows the Federal Reserve to break up companies that it thinks are so large that their failure would pose a risk to the U.S. and global economy.
The lack of this authority forced the Bush administration and a Democratic-led Congress to choose unpopular bank bailouts over a disruptive bankruptcy process that Fed Chairman Ben Bernanke warned could have led to a global economic depression.
“The bill isn’t perfect, since it represents what was politically achievable in an election year. But it sets some important starting points for more detailed work in areas where oversight has been lacking, such as viewing risk from a systemic point of view and increased consumer protection,” said Scott McCleskey, the author of the new book When Free Markets Fail, which seeks to explain the crisis in layman’s terms. “In the end, though, the crisis made abundantly clear the fact that we need more regulation because the markets have become too complex to regulate themselves.”
For ordinary Americans, the legislation will be felt most directly through the creation of a new and independent Bureau of Consumer Financial Protection. It will police credit extended to consumers, be it mortgages, credit cards, student loans, auto loans or even payday loans.
“For the first time, families will have a tough, independent cop in Washington to help clear out the tricks and traps hidden in consumer credit agreements,” Elizabeth Warren, a Harvard University professor who’s credited with developing the idea of the bureau, said in a statement.
Gail Hillebrand, a senior attorney for the advocacy group Consumers Union, added that “millions of Americans have been hit by shady loans, hidden fees and surprise rate increases, and this Consumer Financial Protection Bureau will take dead aim at these kinds of problems.”
Business groups frowned on the new law. “This legislation, while drafted with the best intentions, paints the U.S. business community with a broad brush and will have many unintended consequences for the more than 12,000 nonfinancial publicly traded companies,” Larry Burton, the executive director of the Business Roundtable, said in a statement.
The U.S. Chamber of Commerce, which aggressively lobbied against the legislation, didn’t pull punches in its statement upon signing. “Such a broad, sweeping bill epitomizes a law with unintended consequences that creates more uncertainty for American businesses,” said Thomas J. Donohue, the chamber’s president and CEO. “For years the chamber has called for reform that modernizes our financial system. Yet this law is like adding new paint on an old car; it’s still not going to run at the pace and with the agility that is currently demanded.”
Regulators will sit together on a special council to collectively study risks to the broader financial system. They’ll be empowered to order that banks keep more capital on hand to guard against future losses, and they’ll have knowledge that they didn’t have before about the complex financial instruments called over-the-counter derivatives. The size of the market for these private bets between parties is valued in the trillions of dollars, yet these deals largely have been hidden from regulators.
Now, most trading in these complex instruments will be done on public exchanges or clearinghouses, and regulators will have the authority to limit a financial player’s overall holdings in contracts for oil, natural gas, wheat or other commodities if it appears that anyone is seizing so much of the market that prices could be manipulated.
“It gives us the transparency, tools and teeth we need to better regulate the markets we already oversee and to bring light to the more than $600 trillion over-the-counter markets which are currently unregulated,” said Bart Chilton, a commissioner on the Commodity Futures Trading Commission (CFTC). “Many key items will be decided in the near future: How do we actually oversee and regulate the OTC markets? How do we implement position limits? And how are we going to use some of these new professional-grade regulatory tools to police these markets? For example, CFTC has had only one successful manipulation prosecution in 35 years. The law was broken but the bill gives us new authority to go after disruptive trading practices.”