The House and Senate bills have many similarities; in fact, it's probably not a stretch to say that they are both built on the same foundational ideas. They each create a new systemic risk regulator, non-bank resolution authority, consumer watchdog, and a more aggressive regulatory framework for derivatives and securitization. But there are also some very important differences between the two bills, as the Senate bill is more aggressive in some ways, like on rating agencies and derivatives. But the House's bill contains tougher language in other sections, such as setting leverage limits and creating a truly independent consumer financial protection agency.
In the weeks to come, the two chambers will have to compromise on a final version of the bill. Then it will make its way to President Obama's desk, who will eagerly sign it into law. Given the sense of urgency among Democrats to wrap the bill up, we should see the President sign it this summer.
Historians will probably conclude that the package of reforms was surprisingly modest given the depth and severity of the 2008-09 financial crisis. A harsher historical judgment might find that the political and economic power wielded by the financial industry in the late 20th and early 21st centuries was so extensive that it could weather a near total collapse of the system without having to yield its power or privilege.
The House and Senate bills -- which are a lot alike, fortunately -- both leave the system at least as complicated as it is at the moment. That was a big part of the problem before the crisis, and if anything it has been made worse. (The council of regulators is a weak solution.) But simplification never seemed to be on the agenda at any stage. That is a shame, and something the architects will come to regret.
A sigh of relief is due on Wall Street. The procedural finale for the Senate’s debate on financial reform came just in time for banks. The bill got tougher as the talk dragged on. But it could have been worse. While banks’ future activities and profitability may get pinched, their core business model appears intact.
Some conservatives and liberals alike are complaining that the bill won’t prevent future bailouts. That’s the wrong mission. Bank bailouts are necessary and inevitable, as we learned in 1933: that’s why we have deposit insurance. What people most disliked about 2008, I’d hypothesize, is not that non-bank financial firms were “bailed out,” but that the bailees profited so handsomely from their bailout. “Bailouts” would not be a dirty word today if shareholders and executives at Goldman Sachs, Morgan Stanley, etc. had shared in the kinds of losses that were suffered at Lehmann Brothers and AIG.
The “resolution authority” invented in the finreg bill purports to authorize the feds to do just that. It doesn’t stop bailouts. It does * try * (key word) to do something better and more worthwhile: it tries to deter them by adding to their future potential painfulness to the parties who cause them.
[T]he upshot of financial reform will have been to make it costlier to be a big bank relative to being a small or medium-sized bankwhich is to say, it has effectively taxed bigness. That’s because the legislation imposes a handful of new mandates and regulationslike oversight by a soon-to-be-established consumer financial protection agency, as well as limits on fees for debit-card transactionsfrom which small and medium-sized banks are exempt. Other reformssuch as a bill Congress passed last year to limit hidden credit-card fees and make statements more transparent, and new restrictions on trading derivativeswould disproportionately dent profits at megabanks. These banks tend to have far bigger credit card operations, and are the only bona fide derivatives brokers around.
The big banks typically complain that these efforts will drive them out of this or that line of business, or at least curtail their activity significantly. And there may be something to those concerns. But in a world in which we worry about megabanks doing too much rather than too little, that’s not necessarily a bad thing. If only there were a bit more of it.
Like with health-care reform or stimulus, what we have here is a major achievement and a clear step forward, but an insufficient solution to a problem that will continue to dog us. And so the question is not just what the 111th Congress did, but whether the process has educated the members who will continue onto the 112th and 113th and 114th Congresses and has persuaded them to keep paying attention to these issues and to continue building on their legislation.
You can argue that some of these reforms will backfire, and some probably will. But you cannot argue that the reforms amount to little or nothing. These are big changes.
(Image: Traders work on the floor of the New York Stock Exchange on May 17, 2010 in New York, New York. By Spencer Platt/Getty Images)