House Passes Financial Reform

By Lisa Valentine

It’s official – the U.S. House of Representatives passed financial regulatory reform legislation. The bill: H.R. 4173, The Wall Street Reform and Consumer Protection Act of 2009, was passed by a vote of 223 to 202. Not overwhelming, not by a long shot.

In the news release describing the passage, the house specifically mentions protecting Americans from “unscrupulous big banks.” It’s interesting that the house felt it necessary to qualify the type of bank that can be unscrupulous. Apparently the bill will do nothing to protect Americans from unscrupulous small or mid-sized banks.

The bill also will “hold Wall Street accountable” and “end taxpayer-funded bailouts.”

The bill now moves on to the Senate.

Here’s an overview of the act:

• Create a Consumer Financial Protection Agency (CFPA).
• Create a Financial Stability Council of regulators who are tasked with identifying those financial firms “too big to fail” and slapping them with increased oversight, standards and regulation.
• Instill an orderly process for shutting down big firms such as “AIG or Lehman Brothers” without taxpayer bailouts. (Of course, Lehman didn’t receive a taxpayer bailout but were allowed to fail, a point overlooked in the news release.)
• Give shareholders a “say on pay” and give regulators the power to ban “inappropriate or imprudently risky compensation practices.” It also requires financial firms to disclose incentive-based compensation structures.
• Strengthen the SEC.
• Regulate OTC derivatives.
• Outlaw predatory mortgage lending. Here’s a novel idea: financial institutions should ensure that any mortgages they make have a chance in hell of being repaid.
• Require hedge funds to register with the SEC.

Mary Schapiro, Chairman of the SEC, had this to say about the passage: “I applaud the House for taking this historic step to bolster investor protections and fill gaps in our financial regulatory framework. I look forward to continuing to work with Congress on this very significant legislation.”

From Gary Gensler, Chairman of the Commodities Futures Trading Commission: “I commend the House of Representatives for passing historic, landmark legislation that, for the first time, will bring regulation to the over-the-counter derivatives marketplace. The bill comprehensively regulates swap dealers and major swap participants and lays out the framework for the use of clearinghouses and transparent trading facilities. I look forward to continuing to work with Congress on this crucial issue as the bill moves to the Senate.”

Hmmm. Do you think Schapiro and Gensler worked on their remarks together? The SEC and CFTC have agreed to work in harmony, but mimicry is going a bit too far.

It’s an amazingly comprehensive (and we don’t mean that in a necessarily positive way) piece of legislation. If passed by the Senate, it will change Wall Street. This post just gives an overview of the bill; we’ll be looking at the impact on parts of our financial system in the days ahead.