Major U.S. financial regulation reform proposals

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


Fri May 21, 2010 5:27pm EDT


May 21 (Reuters) - The U.S. Senate approved landmark Wall Street reform legislation on May 20 that was proposed by Democrats and backed by President Barack Obama to tighten financial regulation after the 2007-2009 financial crisis.

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It must now be merged with a similar measure backed by the U.S. House of Representatives in December. Further changes could be made to the bill in what is expected to be a House-Senate conference committee.

A final version will go to Obama to sign it into law. That could happen by July 4, analysts say.

Here are the Senate bill's key elements, how they compare to the House bill, and winners and losers:

PREVENTING MORE BAILOUTS

* Objective: Squash the idea that some financial firms are so central to the economy that they are "too big to fail." The aim is to avoid a repeat of 2008, when the Bush administration signed off on costly taxpayer bailouts of firms such as AIG (AIG.N) but caused a panic by refusing to bail out Lehman Brothers, whose bankruptcy froze capital markets worldwide.

Seeking a middle ground between bailout and bankruptcy, the Senate bill sets up an "orderly liquidation" process that would allow authorities to seize large firms in distress. Costs of such actions would be covered by sales of liquidated firms' assets and, in case of shortfalls, fees on other large firms.

* House-Senate dynamic: The House bill would set up a somewhat simpler liquidation process that would include a $200 billion prepaid fund to cover its costs.

* Winners and losers: If the new strategy works, the economy is better protected from financial sector crises. Big financial firms could take a hit from paying fees.

PROTECTING CONSUMERS

* Objective: Stop abusive home mortgages, credit cards.

The Senate bill would create a consumer protection bureau within the Federal Reserve to regulate such products.

State authorities would be able to enforce new rules issued by the watchdog but could not cross state lines to charge nationally regulated banks. Federal authorities would still be able to overrule state laws under certain conditions.

House-Senate dynamic: The House bill calls for an independent consumer protection agency, while the Senate bill puts it in the Fed to appease Republicans.

The House bill exempts many businesses from the watchdog's oversight. The Senate bill has fewer outright exemptions. A fight is under way on whether to exempt auto dealers.

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

VOLCKER RULE

* Objective: Ban risky trading unrelated to customers' needs at deposit-insured banks whose federal backing enables them to borrow money more cheaply than rivals.

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

Under the Senate bill, the Volcker rule would be adopted, but regulators would write its details, possibly weakening it.

Democratic Senators Jeff Merkley and Carl Levin offered an amendment that would have given regulators stricter orders, while also requiring large nonbank financial institutions to set aside more capital for speculative activity, and prohibiting financial firms from betting against their customers. Republicans blocked the Merkley-Levin amendment from coming up for a vote.

* House-Senate dynamic: The Volcker rule is not in the House bill, but it would let regulators bar proprietary trading in cases where it threatens financial system stability.

* Winners and losers: Large firms could lose profits if the rule is enacted. But the Senate bill, as written, falls well short of making that a certainty. Volcker says the rule would help prevent the next financial crisis.

OVER-THE-COUNTER DERIVATIVES

* Objective: Regulate and reduce risks in the $615 trillion over-the-counter derivatives market, which helped amplify the crisis. The market is presently unregulated.

The Senate bill proposes new rules to push as much OTC derivatives traffic as possible through central clearinghouses and increase transparency through exchange trading.

It also would require banks to spin off their swap-trading units into affiliates. Banks and regulators oppose this. Analysts say this provision may be dropped in conference.

* House-Senate dynamic: The two bills are similar, but the House exempts a wider range of end users from central clearing and excludes the swap-trading desk "push-out" provision.

* Winners and losers: Wall Street firms -- Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Citigroup (C.N), Bank of America (BAC.N), Morgan Stanley (MS.N) and Wells Fargo (WFC.N) -- dominate the OTC derivatives market. The substantial profits they reap from it could be sharply reduced.