Foreign Policy Blogs

Senate Passes Historic Financial Reform Bull



As I was busy eating dinner this evening word came over the airwaves  – no, not from the television; in my office in front of my trusty computer – that the U.S. Senate had finally, and unexpectedly, passed the much ballyhooed Wall Street Reform bull, errr … I mean ‘bill’ – an amazing feat even for my cynical sensibilities.  Among other things, this historic and sweeping piece of legislation includes consumer financial protections, too-big-to-fail restrictions and Federal oversight, conflict of interest limits on proprietary trading against clients or so-called ‘Volcker Rule’ provisions, as well as limits on, and regulatory oversight of highly volatile derivatives trading.

The Senate vote, 59-39 and supported by just a handful of Republicans, represents a major achievement for the Obama administration despite strong GOP opposition and coming just months after the historic, but substantially watered-down, Healthcare reform package.  The reform package will likely be in play during the Mid-term election this Fall. Read more on that hereThe legislation also largely reflects the Obama ‘New Foundations’ financial reform plan submitted to Congress by Treasury Secretary Tim Geithner last Summer.  A plan many believe, myself included, did not go far enough in policing Wall Street and amounts to only a slap on the wrist.  Although the legislation also creates a mechanism for liquidating failing financial firms and a council of financial regulators to monitor markets for threats to the economy, it seems telling that after spending tens of millions on lobbyist to oppose and water-down the legislation, it passed with the support of both Goldman Sachs and CitiGroup. The Senate move now sends the legislation into the House-Senate conference committee for negotiations designed to reconcile the small differences between the two versions, which the House had earlier approved in December of last year.  “We’ve got a very strong, good bill,” said Senator Chris Dodd of Connecticut, the Senate Banking Committee chairman who sponsored the legislation, although he added, “There’s still a conference probably to go and we’re going to do some additional work.” Still, this was welcomed news as Republicans, facing voter repudiation of their obstructionist agenda, were unable to muster the votes or the support to kill or water-down the bill.

chris-dodd-image1Congressional Democrats moved to overhaul governance of U.S. banks, financial companies and Wall Street investment firms in response to the 2008 financial crisis that followed the collapse of some large investment firms, and the subprime mortgage market. The Senate and House measures aim to prevent a repeat of the $700 Bn taxpayer-funded bailouts that helped firms including American International Group Inc., Bank of America and Citigroup Inc. weather the worst recession since the Market Crash of 1929.  Yet, despite the clear danger an un- or under-regulated Wall Street might pose to our economic national security, the industry is breathing a ‘sigh of relief’ with the passage of this legislation because it does not go as far as the industry had feared. Read more on that here.

New York Times: Wall Street Reform – House vs Senate Version

It is only in recent weeks sensing strong anti-Wall Street populist sentiments in the national mood, facing low poll ratings for Republicans nationwide and with their party in seeming disarray that Republicans finally capitulated in stifling the advance of the legislation. Still, Republicans condemned the bill, saying it failed to deal with government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which were seized by the government in 2008. The Republicans also said the consumer financial protection bureau the bill would create as part of the Federal Reserve Bank would establish a massive new government bureaucracy, while Republicans continue to advocate for deregulation and unfettered free-markets – the very measures experts agreed led to the global financial meltdown. “The failure to address the GSEs is the most glaring omission in this legislation,” said Senator Dick Shelby, the banking committee’s top Republican, before the vote. “This bill will stifle innovation in consumer financial products and reduce small-business activity,” preferring instead a ‘Caveat Emptor’ approach to consumer protections against unsavory business practices.

The Senate measure adopts priorities that President Obama outlined last June for strengthening financial regulations. It permits, for example, the FDIC to seize, then liquidate large failing financial firms in an orderly fashion if their collapse seems imminent and could threaten the national economy, thus making a sound financial system a matter of American national security, as Chairman of the Joint Chiefs, Adm. Mike Mullen argues in this month’s issue of Fast Company magazine.


Our financial health is directly related to our national security.                                               – Adm. Mike Mullen


The reform bill will create a consumer financial protection bureau at the Fed with powers to write and enforce rules banning abusive credit card and mortgage lending practices. It calls for a one-time audit of the Federal Reserve’s emergency actions leading up to the financial meltdown in 2008, and beginning in December 2007.  The Senate version also includes language offered by Senate Agriculture Committee Chairwoman Blanche Lincoln that would require commercial banks to separate  their customer banking business, from their proprietary trading operations – one of the most contentious and difficult issues of the Senate debate.  The underlying legislation would push most of the $615 Trn in over-the-counter derivatives Market to be cleared through a third party compliance operations provider, such as DTCC.  The bill would also force transparency of over-the-counter derivatives trading onto regulated exchanges or similar electronic systems, thus creating some balance between counter-parties.

Derivatives have taken a central role in the debate after losing bets on swaps tied to mortgage-backed securities pushed AIG, the New York-based insurer, to the brink of bankruptcy when the housing market collapsed in 2008. Derivatives are contracts whose value is derived from underlying stocks, debt, mortgage loans, currencies and commodities, or linked to specific events such as changes in interest rates, conflicts, or even changes in the weather.  Read more here.

Source: Wall Street Journal, Bloomberg, NYTs         Image: NY Daily News



Elison Elliott

Elison Elliott , a native of Belize, is a professional investment advisor for the Global Wealth and Invesment Management division of a major worldwide financial services firm. His experience in the global financial markets span over 18 years in both the public and private sectors. Elison is a graduate, cum laude, of the City College of New York (CUNY), and completed his Masters-level course requirements in the International Finance & Banking (IFB) program at Columbia University (SIPA). Elison lives in the northern suburbs of New York City. He is an avid student of sovereign risk, global economics and market trends, and enjoys writing, aviation, outdoor adventure, International travel, cultural exploration and world affairs.

Areas of Focus:
Market Trends; International Finance; Global Trade; Economics