Factbox: Major financial regulation reform proposals

Posted on Reuters.com.  Click here to view original article.

Reporting by Kevin Drawbaugh; Editing by James Dalgleish
Thu Apr 29, 2010 9:42pm BST


(Reuters) - The Senate is moving closer to a vote on financial regulation reform legislation proposed by Democrats and backed by President Barack Obama.

The Senate bill would tighten the regulatory screws on banks and capital markets after the 2008-2009 financial crisis. Approval was considered likely, but not absolutely certain.

Republicans are still trying to water down the bill, which won Senate committee approval last month.

The House of Representatives approved a bill in December. It would have to be merged with whatever the Senate produces before a final measure could go to Obama to be signed into law. Analysts say that could happen by mid-year.

Below are snapshots of the major reform proposals.

PREVENTING MORE BAILOUTS

* Objective: Squash idea that some financial firms are "too big to fail." Prevent future bailouts like AIG's.

But also, prevent disaster that can come from refusing to bail out troubled firms, as Bush administration did in 2008 with Lehman Brothers. Its collapse froze markets worldwide.

Seeking a middle ground between bailout and bankruptcy, Senate bill sets up "orderly liquidation" process for large firms in distress. Authorities could seize and dismantle them.

Bill creates $50-billion fund to pay for such actions. Firms with assets above $50 billion would pay into fund.

Republicans object to this. Fund could borrow from Treasury if it ran short of money. "Backdoor bailout," Republicans say.

* House-Senate dynamic: House bill, like Senate's, sets up new liquidation process, but it's simpler and bigger.

House wants a $200-billion fund. Firms with assets over $50 billion would pay $150 billion into it. Fund could borrow another $50 billion from the Treasury if needed.

* Winners and losers: If new strategy works, economy is better protected from damaging financial sector crises. Big financial firms likely take a hit by having to pay fees.

Some Republicans want to kill liquidation fund idea entirely, but "orderly liquidation" needs financing.

There is wide, bipartisan support for a new liquidation process. Someone will have to pay for it. With congressional elections set for November, it probably won't be taxpayers.

PROTECTING CONSUMERS

* Objective: Stop abusive home mortgages, credit cards.

Senate bill creates financial consumer protection bureau inside Federal Reserve to regulate such products.

Obama, many Democrats want more, namely a watchdog that is an independent agency, with more power than a Fed unit.

House-Senate dynamic: House bill calls for independent agency. Senate bill puts it in Fed to appease Republicans.

House bill exempts many businesses from watchdog's oversight. Senate bill has fewer outright exemptions.

Winners and losers: Consumers can expect stronger protections. Credit card firms, mortgage lenders face tougher regulatory regime ahead, regardless of where watchdog set up.

VOLCKER RULE

* Objective: Ban risky trading, unrelated to customers' needs, at banks with cost-of-capital edge conferred by their being backed by taxpayers, either directly or otherwise.

Obama proposed this ban on "proprietary trading" in January, along with his adviser, former Fed chairman Paul Volcker. It may become law, but probably not as written.

Provisions embodying "Volcker rule" are in Senate bill, but it leaves door open to regulators watering it down later.

* House-Senate dynamic: Volcker rule not in House bill.

* Winners and losers: Too soon to say. Volcker says enacting rule would avert next financial crisis. Large firms could lose profits if rule is enacted. But Senate bill, as written, falls well short of making that a certainty.

OVER-THE-COUNTER DERIVATIVES

* Objective: Police $450-trillion over-the-counter derivatives market. A hothouse for risk during boom years, it greatly amplified the financial crisis.

Senate bill proposes new rules along lines sought by Obama. He wants to push as much OTC derivatives traffic as possible through exchanges, electronic platforms and clearinghouses, boosting transparency, risk comprehension, price competition.

* House-Senate dynamic: Two bills similar, but House exempts wide range of end users from mandatory central clearing. Issue complicated by involvement of House and Senate agriculture committees, which have their own bills.

* Winners and losers. Wall Street mega-firms -- Goldman Sachs, JPMorgan Chase, Citi, Bank of America and Morgan Stanley -- dominate market. The fat profits they reap from it would be reduced.

SYSTEMIC RISK

* Objective: Create new entity to spot and head off next crisis. Senate bill sets up nine-member council of regulators, chaired by the Treasury secretary.

* House-Senate dynamic: House bill proposes council chaired by the Treasury, as well, but gives Fed a bigger role.

* Winners and losers: Big banks and financial firms would be forced into tighter regulatory straitjacket.

POLICING BANKS

* Objective: Rationalize jigsaw-puzzle bank supervision system to stop problems from festering in the cracks.

Senate bill lets Fed keep oversight of large bank holding companies with assets over $50 billion. But Fed would lose power over state banks with less than $50 billion in assets.

Those would shift to Federal Deposit Insurance Corp, which would be in charge of all state banks and thrifts, as well as holding companies of state banks under $50 billion.

National banks with assets below $50 billion would be under Office of the Comptroller of the Currency, which would also absorb Office of Thrift Supervision, which would close.

* House-Senate dynamic: Big differences -- House bill preserves Fed's and FDIC's bank supervision roles.

* Winners and losers: OTS will close -- both House and Senate bills call for that. Otherwise, banks would lose ability to shop around for weakest regulator.

EXECUTIVE PAY AND SHAREHOLDER RIGHTS

* Objective: Give shareholders more say on executive pay and more clout in electing directors.

* House-Senate dynamic: Both bills back these ideas, but House less forceful than Senate bill on director nominations.

* Winners and losers: Corporate managers' could lose their strangle-hold on director nomination process. Shareholders could gain more say on pay, but it would largely be symbolic.

REGULATING HEDGE FUNDS

* Objective: Hedge funds must register with government, opening their books to more scrutiny, but Senate bill exempts venture capital funds and private equity funds.

* House-Senate dynamic: House bill calls for registration of hedge funds worth $150 million or more. Senate's cut-off level is $100 million. House bill exempts venture capital funds from full registration, while requiring offshore funds to register. Senate bill does not do this.

* Winners and losers: Regulators would gain window into murky market. An estimated 55 percent of hedge funds are already registered. Those that are not would have to do so.

FIXING SECURITIZATION

* Objective: Make securitization market more transparent and accountable. Senate bill forces securitizers to keep baseline 5 percent of credit risk on securitized assets.

* House-Senate dynamic: Bills similar.

* Winners and losers: Investors in securitized products would be better protected. Securitizers -- from lenders to Wall Street bundlers -- face stricter oversight.

CRACKING DOWN ON CREDIT RATING AGENCIES

* Objective: Boost SEC's power over credit rating agencies. Senate bill also reduces instances in law that mandate use of unneeded ratings, and exposes raters to more legal risk.

* House-Senate dynamic: Bills similar.

Winners and losers: Major rating agencies -- Moody's Corp, Standard & Poor's, Fitch Ratings -- face stricter oversight, but their business models survive.