What’s In the Senate Wall Street Reform Bill?

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UPDATE: The Wall Street filibuster of financial reform was broken Wednesday night. Now the Senate moves to a full and open floor debate – where the public will expect Senators to take a stand against bank
lobbyists’ efforts to weaken reform.

Consumer Watchdog has called for a full and open debate on the Senate floor on financial reform. That means an end to the filibuster stalling tactics being used by friends of Wall Street. (Tuesday marked the second filibuster and counting.) The effort to keep the Senate from real debate keeps negotiations behind closed doors – where Wall Street, not Main Street, has the edge.

It’s time for the Senate to debate the financial reform bill in the U.S. Senate. But is Senator Dodd’s bill – S.3217 – strong reform?

The current Senate bill champions some critical elements of real reform, but also contains some big loopholes and some straight industry giveaways.

S.3217 creates a Consumer Financial Protection Bureau to write new rules of the road for all consumer financial products – whether it’s your mortgage, your credit card, bank account or car loan – to make sure lenders are honest and playing fair. This is a huge improvement over the current system where consumer protection is scattered over 7 different agencies, most of which are far more concerned with bank profitability than consumer protection. But there are still problems. An agency must be independent and, although the agency would have a presidentially-appointed director and an independent budget, it’s housed at the Federal Reserve (notorious for its consumer protection failures) and its rules are subject to veto by existing bank regulators. It also doesn’t have full enforcement authority (every consumer knows that if a rule isn’t enforced it’s usually not worth having) and there is a big industry lobbying push underway to block states’ ability to enforce its rules too. Consumer Watchdog supports efforts to restore full rulemaking, enforcement and examination authority to the agency. Download letters on other key consumer issues including: private student loans, state enforcement of bank rules, and attempts by car lenders to exempt themselves from new rules entirely.

The so-called “Volcker Rule” would ban banks that take consumer deposits (our money) from using that money to make bets for their own benefit in the Wall Street casino. The Dodd bill takes a step in that direction, but institutes the ban only after a study and recommendations by a new council of regulators that could severely weaken its impact. Consumer Watchdog supports an amendment offered by Senators Merkley and Levin that would strengthen the Volcker Rule, and also block Goldman-style conflicts of interest that allowed the investment giant to make big money betting against its clients. (Download the letter.)

How the bill will regulate derivatives is a $64,000 question. This is the $600 trillion securities market that currently operates in the shadows and, thanks to their role in AIG’s spectacular near-collapse, made ‘credit default swap’ a household term, at least inside the Beltway. Real reform must require derivatives to be cleared and traded on open exchanges, restrict exemptions from that requirement only to companies who must use derivatives to hedge legitimate business risk (think cereal-makers hedging the price of wheat), and set high capital requirements for those derivatives that aren’t cleared. (Download Consumer Watchdog’s letter.) Just as important, and ignored in the current bill, are “naked” or “synthetic” swaps – which traders use solely to make high-stakes bets on whether someone else’s loans will go bad. That kind of bubble or bust bet helped cause the crisis and Consumer Watchdog agrees with Sen. Byron Dorgan when he says he wants to ban them completely.

To keep everyone on their toes, the bill contains some deregulation too – of the insurance industry. The bill’s "Office of National Insurance" would let the Treasury Department override state insurance protections on behalf of foreign insurance companies. It grants Treasury the authority to set a new ceiling on insurance regulation, through international agreements negotiated behind closed doors where insurance consumers, state regulators and Congress have zero chance to weigh in, and then use those agreements to preempt state laws. A measure that would further deregulate financial services by rolling back existing state insurance protections doesn’t belong in the bill that’s supposed to be re-regulating financial services – download our letter here.

The bill creates a resolution system that would allow the federal government to wind down a large bank whose collapse could threaten the economy, and use the banks’ money instead of a taxpayer bailout to do it. But why let the banks get big enough to threaten the stability of the entire economy in the first place? Two key reforms the Dodd bill doesn’t include are leverage and size limits on banks – critical to ending “too big to fail” once and for all. The SAFE Banking Act amendment from Senators Brown, Kaufman, Casey, Whitehouse and Harkin (now also Merkley, Sanders), would do both.

Check back for the latest on the bill and whether, two years after Wall Street came begging to taxpayers for a bailout, we finally have real reform.

Consumer Watchdog
Consumer Watchdoghttps://consumerwatchdog.org
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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