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Momentum Mounts
For Financial Overhaul

Congress will remake the regulatory structure in an attempt to discourage excessive risk and protect consumers.

An overhaul of financial regulations is a good bet as President Obama, fresh from his health care victory, takes on another huge swath of the U.S. economy. “The general atmospherics has shifted in favor of a bill,” says Robert Litan, vice president of research and policy at the Kauffman Foundation.

One thing working in favor of the bill is the popular support, with polls showing almost a reverse of views on the more contentious health care bill. According to a Pew Financial Reform Project survey last month, 59% of voters said Congress and the administration should support financial reform now over other priorities. They are still seething at Wall Street over the crisis that helped send the economy into a long, deep tailspin leading to job and home losses. “There is a lot of pressure on lawmakers to get something done,” says Charles Taylor, head of the Pew Project.

The House passed its version of reform in December, and a Senate measure is headed to the floor later this month. To get through Congress, bill sponsors need to hang onto Democratic support, while picking up a vote or two from the Senate GOP side. Without at least some bipartisan support, the bill will fall prey to a filibuster. Key Republicans want to reach a compromise, and probably will. “Republicans in the middle don’t want to be accused of being handmaidens of the banks,” says Litan.

But powerful and well-heeled opponents are doing their best to block the bill -- or at least weaken many of the proposed restrictions on bank activities. Big banks and business groups are spending millions on lobbying, trying to turn the tables on Democrats, saying the bill will ensure, not prevent, new bailouts.


They may well succeed in winning some concessions, but with momentum mounting, they will be hard-pressed to stop the bill altogether.

Over time, as the bill gets implemented, the new law will affect almost all Americans, providing safeguards for consumer and business lending. It will touch financial products ranging from payday loans to private equity investments.

Big financial firms will feel the most pain. Banks, investment companies, insurers and other large financial institutions that hold $50 billion or more in assets will face more regulation, additional disclosure rules and new fees. Smaller banks, nonbank lenders and credit unions will see heightened scrutiny as well.

Despite the ongoing debate, most of the measure’s planks are settled, at least in principle. The remaining battles are being fought over the scope and scale of reforms. Key elements include:


Consumer protections. A new watchdog agency will police financial products, requiring better disclosure of risks and blocking those deemed likely to lead to a bubble. Disagreement persists over where to locate the consumer watchdog and what limits to put on its power. Obama wants an independent agency, but that won’t fly. Expect it to end up inside the Federal Reserve. Also, its jurisdiction is still being worked out--specifically, whether it should supervise auto dealers and real estate brokers.

Systemic risk council. The law will bring together existing regulators in a council headed by the Treasury Department to keep track of the big picture. New tools will give it flexibility to handle big corporations that run into trouble. Its most important and controversial element is an emergency pool of more than $50 billion funded through fees on the largest firms. It’s that emergency pool that opponents point to when they say it will encourage risky behavior and ultimately lead to more bailouts.

Regulatory agency shuffle. Say good-bye to the Office of Thrift Supervision. The Fed will watch over the biggest banks while the Federal Deposit Insurance Corporate regulates state banks and the Office of the Comptroller of the Currency supervises national banks.

Derivatives. More trading will move from private, over-the-counter desks to exchanges, where regulators can keep a better eye on them.


Hedge funds. Those with at least $100 billion in assets will have to open their books to regulators.

Credit rating agencies. The Securities and Exchange Commission will boost oversight.

Insurers. Expect a federal office to monitor, but not regulate, the industry.

The bottom line: We expect enactment of a bill before summer ends, but it will take years to implement the law and overhaul the regulatory architecture. And whether the changes will work will still depend on how adept regulators are at spotting trouble. Michael Konczal, a fellow at the Roosevelt Institute, points out that regardless of the available tools, “at the end of the day, you can’t always rely on people to get it right.”

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