Progress on Financial Reform

The Norwalk Hour, Tuesday, May 25, 2010

U.S. Rep Jim Himes, D-4, said Monday that he expects the reconciliation of the U.S. House and Senate bills governing financial regulation to proceed smoothly.

In December, the House passed a financial regulatory bill, which Himes, a former Goldman Sachs banker, helped craft. Last week, members of the U.S. Senate approved their own bill aimed at regulating banks and related institutions to prevent another near meltdown of the nation's financial system as occurred in late 2008. The two bills now must be reconciled if final legislation is to reach President Barack Obama's desk.

"We'll go into a conference to reconcile the differences in the bills. (The bills) are not that different, so I think the conference will be smooth and a couple of things will happen," Himes said. "One, some sort of consumer/finance protection bureau or agency will be created. ... No. 2 is doing away with 'Too big to fail.' The regulators will now be empowered to dismantle a failed institution."

Prodded by national anger at Wall Street, the Senate last week passed the most far-reaching restraints on big banks since the Great Depression. The legislation calls for new ways to watch for risks in the financial system and makes it easier to liquidate large failing financial firms. It also writes new rules for complex securities blamed for helping precipitate the 2008 economic crisis, and it creates a new consumer protection agency.

The Senate bill calls for creation of a Consumer Financial Protection Bureau within the Federal Reserve to police lending, taking powers now exercised by various bank regulators, whereas the House bill proposes a a stand-alone Consumer Financial Protection Agency to police lending.

"It's a little unclear whether it will be a standalone department or whether it will be part of the Fed," Himes said. "The point is it will be a powerful organization designed to go after the mortgage brokers who sold mortgages that families couldn't repay, some of the sharper practices of the credit card companies, some of the really dirty stuff."

Under the Senate bill, the Federal Reserve would retain supervision over bank-holding companies and state-charted banks. It also would police large, interconnected non-bank institutions that the oversight council determines could pose a threat to the economy. With council approval, the Fed could break up large, complex companies that pose a grave threat to the financial system. The Government Accountability Office, Congress' investigative arm, would conduct a one-time examination of the Fed's emergency lending to financial institutions in the months surrounding the 2008 financial crisis.

Under the House proposal, the Federal Reserve would lose consumer protection regulation authority and ability to unilaterally inject money into financial institutions. The GAO would be given broader power to conduct audits of the Fed.

The Senate bill would require trades of derivatives, the complicated financial instruments blamed for accelerating the Wall Street crisis, to take place in regulated exchanges. Banks would have to spin off all their derivatives business into subsidiaries.

While the House bill also would regulate derivatives, it contains more exceptions for corporations that use derivatives as a hedge against price fluctuations, not as a speculative investment. The House bill does not require banks to spin off their derivatives business. Himes said the House bill will drag derivatives "into the light of the day" without harming end users.

"All derivative trades will be reported to regulators, and people like AIG, who play in the derivatives market, will be closely scrutinized and subject to putting capital against the bets they take," Himes said. "The House bill better insulates end users ... the energy companies, the farmers -- most derivatives are used by farmers who want to lock in the price of their corn a year later or by energy companies that need to deliver electricity. The House bill, in my opinion, protects those guys. The Senate bill, I fear, puts too much of a burden on the end users."

Dan Debicella, the Republican state senator from Shelton who is running to unseat Himes this fall, lent his support for requiring that derivatives be traded on public exchanges, but said the larger reform legislation focuses on adding to government rather than bringing transparency to financial institutions.

"The current financial regulatory proposal focuses on more government, rather than bringing transparency to financial institutions," Debicella said. "Instead of creating a new government bureaucracy, we should require the derivatives that caused the crisis to be traded on public exchanges. By putting financial instruments like credit derivative swaps on public exchanges, we can ensure that risky deals are exposed to the light of day."