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Sweeping Financial Reform Bill Passes Senate

On Thursday night, the United States Senate voted (59-39) to pass sweeping reform of financial regulation in the biggest overhaul of financial rules since the 1930s. The bleak economic recession of the past few years has lead to a wave of reform initiatives around the world. But what will this mean for America? Though senators from both parties have been flexing their muscles to appear tough on Wall Street ahead of November elections, the Senate passing this bill has been a wake-up shock for many. "The president has to be very, very happy," said Republican Bob Corker after the vote. "I know it has to be a major victory for him -- in my opinion it's an overreach."

First of all, the Senate Bill will have to be merged with a House of Representatives Bill before being sent to President Obama to be signed into law. Analysts predict that this may happen next month, and Obama said he could sign a bill into law before July 4.

Very simply, this overhaul of financial regulation is meant to avoid a repeat of the 2007-2009 banking and capital market crisis, which spurred the deep recession we are trying to climb out of. The legislation promises to increase restrictions on the banking industry and reduce its profits. Obama has claimed that this legislation will hold financial firms accountable without stifling the free market. The President told reporters, "This is not a zero-sum game where Wall Street loses and Main Street gains."

The Senate Bill includes the creation of a Bureau of Consumer Financial Protection, an independent agency to be housed within the Fed, with rule-making authority and enforcement powers over banks and non-banks which offer financial products or services that have "a material impact on a consumer." The powers of this Bureau would be subject to oversight by the Council of Regulators.
The Council of Systemic Risk Regulators would exist to prevent "bubbles" and stop "too big to fail."

The proposed legislation would also grant the government the ability to wind down failing institutions without risking taxpayers' money. The Bill would require banks to eliminate derivatives from their operations - a contentious move that may not survive a reconciliation with the anticipated House Bill. The Volcker Rule, the "too big to fail" rule, named for White House economic adviser Paul Volcker, did not pass into the finalized Senate Bill. It was feared that its restrictions could hurt insurance companies and other firms that did not contribute to the financial crisis.

If financial reform is signed into law by President Obama, credit rating agencies and large financial firms are expected to come under fire, while small banks and the U.S. Federal Reserve stand to do well. Credit rating agencies could be subject to greater liability, and the biggest of these agencies could face increased competition from the smaller competitors. The Senate bill calls for a credit rating agency board to choose which rating agency would rate an issuer's debt.
Large financial firms could be prohibited from proprietary trading and investing in hedge funds and private equity funds. They would also be required to set aside billions of dollars in extra capital to ensure stability in the financial system. The bill could force large banks to spin off their profitable derivatives desks or risk losing access to the Fed's emergency funds. Most derivatives would be forced on to exchanges or through clearinghouses, in order to limit the effect that these large, risky trades have had on the economy; however, this could cut in to bank profits. Also, mortgages and credit cards would have new rules imposed upon them.

Meanwhile, the U.S. Federal Reserve would gain powers to supervise systemically important financial firms, retain its power to supervise banks of all sizes, be included on a risk council that would have the authority to monitor risk in the financial system and determine whether or not large complex companies need to divest assets, and house the new Consumer Financial Protection Bureau. Small banks would be supervised by the Fed, a supervisory structure they are already comfortable with. The consumer financial products of small banks would continue to be enforced and overseen by prudential regulators.

Consumers are afraid of what these changes could mean. For example, the new Consumer Financial Protection Bureau would be housed in the Federal Reserve, which has been widely criticized for its failures over the last four years, even by senators from both parties. The Dow Jones industrial average slid 3.6 percent on Thursday, hurt by a combination of trepidation surrounding Europe's debt crisis and uncertainty over the potential effects of U.S. financial reform. Many politicians have pushed to speed reform so as to ease uncertainty in the public.

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Steven J. Williams, P.C.
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