Senate Approves Sweeping Legislation to Revamp Financial Regulation

Financial Overhaul Signals Shift on Deregulation

The New York Times

16 July  2010

WASHINGTON — Congress approved a sweeping expansion of federal financial regulation on Thursday, reflecting a renewed mistrust of financial markets after decades in which Washington stood back from Wall Street with wide-eyed admiration.

The bill, heavily promoted by President Obama and Congressional Democrats as a response to the 2008 financial crisis, cleared the Senate by a vote of 60 to 39, largely along party lines, after weeks of wrangling that allowed Democrats to pick up the three Republican votes to ensure passage.

The vote was the culmination of nearly two years of fierce lobbying and intense debate over the appropriate response to the financial excesses that dragged the nation into the worst recession since the Great Depression.

The result is a catalog of repairs and additions to the rusted infrastructure of a regulatory system that has failed to keep up with the expanding scope and complexity of modern finance.

The bill subjects more financial companies to federal oversight, regulates many derivatives contracts, and creates a panel to detect risks to the financial system along with a consumer protection regulator. It leaves a vast number of details for regulators to work out, inevitably setting off another round of battles that could last for years.

Over the last half-century, as traders and lenders increasingly drove the nation’s economic growth, politicians of both parties scrambled to get out of the way, passing a series of landmark bills that allowed financial companies to become larger, less transparent and more profitable.

Usury laws were set aside. Banks were allowed to expand across state lines, sell insurance, trade securities. The government watched and did nothing as the bulk of financial activity moved into a parallel universe of private investment funds, unregulated lenders and black markets like derivatives trading.

That era of hands-off optimism was gaveled to an end on Thursday as the Senate gave final approval to a bill that reasserts the importance of federal supervision of financial transactions.

“The financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate. This reform will foster that innovation, not hamper it,” Mr. Obama said Thursday. “Unless your business model depends on cutting corners or bilking your customers, you have nothing to fear.”

The White House said Mr. Obama would sign the legislation next week.

Democrats, who celebrated with high fives and handshakes as the bill was packed in a blue box for delivery to the White House, argue that the government’s expanded role will improve the stability of the financial system without sapping its vitality. But that project faces considerable challenges. Many investors have withdrawn from markets like commercial paper that were once seen as safe. Lenders have lost faith in borrowers. Politicians and central bankers are struggling to repair economies and restore the flow of credit.

Even the bill’s political luster no longer seems certain. Despite public anger at Wall Street, the vast majority of Republicans opposed the bill with loud confidence, betting ahead of hotly contested midterm elections that the public dislikes government even more.

Senator Richard Shelby, Republican of Alabama, described the bill as “a 2,300-page legislative monster.”

“It creates vast new bureaucracies with little accountability and seriously, I believe, undermines the competitiveness of the American economy,” Mr. Shelby said on the Senate floor before the final vote. “Unfortunately, the bill does very little to make our system safer.”

The three Republicans who voted in favor were New England moderates, Olympia J. Snowe and Susan Collins of Maine and Scott Brown of Massachusetts. The one Democratic holdout was Russ Feingold of Wisconsin, who said he voted against the bill because it was not tough enough.

The bill expands federal banking and securities regulation from its focus on banks and public markets, subjecting a wider range of financial companies to government oversight, and imposing regulation for the first time on “black markets” like the enormous trade in credit derivatives.

It creates a council of federal regulators, led by the Treasury secretary, to coordinate the detection of risks to the financial system, and it provides new powers to constrain and even dismantle troubled companies.

It also creates a powerful new regulator, appointed by the president, to protect consumers of financial products, which will be housed in the Federal Reserve. The first visible result may come in about two years, the deadline for the consumer regulator to create a simplified disclosure form for mortgage loans.

Officials are already working to prepare for the expansion of government, including finding buildings in Washington to house the new agencies.

The rhythms of Washington have long dictated that crises beget legislation, but Democrats insisted Thursday that these changes also represented a long-overdue response to the evolution of the financial industry.

“This is a public sector response to transformative changes in the private sector,” said Representative Barney Frank, Democrat of Massachusetts and a crucial author of the legislation. “You have to have rules that allow you to continue to get the benefit of the innovation but curtail abuses.”

Democrats divided initially over how to pursue that goal. Some pushed to break apart large banks and curtail risky kinds of trading. Others sought a grander overhaul of federal regulation. The administration’s approach, which prevailed, instead is focused on giving existing regulators additional powers in the hope that they will produce better results.

The legislation is painted in broad strokes, so like actors handed a script, those regulators have broad leeway to shape its meaning and its impact.

“This is a framework that has the potential to be as modern as the markets, but its efficacy will certainly depend upon the judgments that regulators make,” said Lawrence H. Summers, the president’s chief economic adviser.

The legislation, for example, requires many derivatives to be traded through clearinghouses, a form of insurance for the traders, and it requires traders to disclose pricing data to encourage competition. But regulators will decide which derivatives, and how long traders can wait to disclose pricing information.

The administration can shape that process through the appointment of new leaders for the various agencies. The Senate held confirmation hearings on Thursday for three nominees to the Fed’s board of governors. In addition to appointing a new consumer regulator, the president will nominate a new comptroller of the currency, responsible for regulating national banks.

The same groups that fought to shape the legislation — bankers and business groups, consumer advocates and trade unions — already have turned their attention to the rule-making process, seeking a second chance to influence outcomes. Much of the work must be completed over the next two years, but the bill sets some deadlines more than a decade from now.

Senator Christopher J. Dodd of Connecticut, who as banking committee chairman was a main architect of the legislation, said its success ultimately would depend on regulators’ performance.

“We can’t legislate wisdom or passion. We can’t legislate competency. All we can do is create the structures and hope that good people will be appointed who will attract other good people,” Mr. Dodd said.

Mr. Dodd said he would hold hearings beginning in September to check up on that work before he retires at the end of the year.

The legislation will be carried out mostly by the same federal workers who were on duty as the financial system collapsed. The new consumer bureau, for example, mostly will be staffed with employees transferred from the consumer divisions of the existing banking regulators, which have been excoriated by Congress and other critics for failing to protect borrowers from obvious and widespread abuses.

Administration officials said they were confident that providing new leaders for those employees and granting them new powers, would produce better results.