House and Senate in Deal on Financial Overhaul

House and Senate in Deal on Financial Overhaul
By EDWARD WYATT
Copyright by The New York Times
Published: June 25, 2010
http://www.nytimes.com/2010/06/26/us/politics/26regulate.html?ref=global-home


WASHINGTON — Nearly two years after the American financial system teetered on the verge of collapse, Congressional negotiators reached agreement early Friday to reconcile competing versions of legislation that would transform financial regulation.

A 20-hour marathon by members of a House-Senate conference committee to complete work on toughened financial rules culminated at 5:39 a.m. Friday in agreements on the two most contentious parts of the financial regulatory overhaul and a host of other provisions. Along party lines, the House conferees voted 20 to 11 to approve the bill; the Senate conferees voted 7 to 5 to approve.

With the agreement in place, President Obama said Friday morning that Congress was “poised to pass the toughest financial reforms” since the Great Depression, homing in on the consumer-protection measures that he said would make lending agreements easier to understand and protect small borrowers from hidden penalties and fees.

He said that the bill contained “90 percent of what I proposed when I started this fight.”

He spoke shortly before flying to a summit of the Group of 20 major economies in Toronto, where leaders are expected to discuss economic reforms and the fragile global recovery.

Members of the House-Senate committee approved proposals to restrict trading by banks for their own benefit and requiring banks and their parent companies to segregate much of their derivatives activities into a separately capitalized subsidiary.

The agreements were reached after hours of negotiations, most of it behind closed doors and outside the public forum of the conference committee discussions. The approvals cleared the way for both houses of Congress to vote on the full financial regulatory bill next week.

The bill has been the subject of furious and expensive lobbying efforts by businesses and financial trade groups in recent months. While those efforts produced some specific exceptions to new regulations, by and large the bill’s financial regulations not only remained strong but in some cases gained strength as public outrage grew at the excesses that fueled the financial meltdown of 2008.

Representative Barney Frank of Massachusetts, who shepherded the bill through the House, said the bill benefited from the increased attention that turned to the subject of financial regulation after Congress completed the health care bill.

“Last year when we were debating it in the house, health care was getting all of the attention and it was not as good a bill as I would have liked to bring out because we were not getting public attention,” Mr. Frank said. “What happened was with the passage of health care, the American public started to focus on this.”

Senator Christopher J. Dodd of Connecticut, the Democratic chairman of the Senate Banking Committee, said legislators were still uncertain how the bill will work until it is in place. “But we believe we’ve done something that has been needed for a long time,” he said.

Treasury Secretary Timothy F. Geithner also praised the conference committee for its work. “All Americans have a stake in this bill,” he said. “It will offer families the protections they deserve, help safeguard their financial security and give the businesses of America access to the credit they need to expand and innovate.”

Legislators had aimed to finish their reconciliation work before President Obama travels to a G-20 meeting this weekend in Ontario, and to approve and deliver a final bill for the president’s signature by Independence Day.

At two minutes before midnight Thursday, some 14 1/2 hours after they began work Thursday morning, members of the House-Senate conference committee approved a final revision of the measure known popularly as the Volcker Rule.

The rule, named for Paul A. Volcker, the former Federal Reserve chairman who proposed the measure this year, restricts the ability of banks whose deposits are federally insured from trading for their own benefit. That measure had been fiercely opposed by banks and large Wall Street firms, who viewed it as a major incursion on some of their most profitable activities.

“One goal of these limits is to reduce participation in high-risk activity that can cause significant losses at institutions which are central to the financial system,” Mr. Dodd said. “A second goal is to end the use of low-cost funds — to which insured depositories have access — to subsidize high-risk activity.”

Banks managed to wrangle limited exceptions to the rule that would allow them to continue some investing and trading activity. The agreement limits banks’ investments in hedge funds or private equity funds to no more than 3 percent of a fund’s capital; those investments could also total no more than 3 percent of a bank’s tangible equity.

Many Wall Street firms, including Goldman Sachs, Morgan Stanley and others, have long engaged in significant amounts of trading for their own accounts, a practice that commercial banks and their parent companies were traditionally less inclined to adopt.

The Wall Street institutions might not have been subject to the new rules except for their decisions during the 2008 financial crisis to convert themselves into bank holding companies in order to gain access to the emergency lending authority of the Federal Reserve.

Most of the first 12 hours of Thursday’s meeting by the committee was spent in recess, as senators and House members huddled with staff members, consulted with Treasury Department officials, were buttonholed by lobbyists, traveled to their respective chambers for votes and waited for proposals and counter-offers to be printed and collated.

After seven hours of additional debate, the conferees approved revisions to the derivatives legislation that would require banks and their parent companies to segregate much of the derivatives trading businesses.

The final restrictions were not as tight, however, as originally approved by Senator Blanche Lincoln, the Arkansas Democrat who is chairwoman of the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission, the chief regulator of derivatives.

Mrs. Lincoln’s proposal that banks be banned from all derivatives activity drew opposition from both sides of the aisle almost since it was introduced this spring. But the provision remained in the Senate bill in part because Mrs. Lincoln was facing a tough primary battle in her home state and portrayed herself as a tough critic of Wall Street.

Mrs. Lincoln won that primary in a runoff, a development that again made legislators somewhat reluctant to oppose her derivatives proposals with the general election looming. Only in recent days did a group of centrist House Democrats threaten to withhold their approval of the entire package unless Mrs. Lincoln loosened her derivatives restrictions.

The group, known as the New Democrat Coalition, includes several House members from New York State, who voiced opposition to provisions that they felt would threaten business and jobs on Wall Street.

Outside of the conference committee chambers, discussions took place through much of the afternoon between Mrs. Lincoln’s staff and groups that have been seeking to produce a compromise derivatives proposal, including other Senate negotiators, Treasury and White House officials, and a group of House members led by Representative Melissa Bean, an Illinois Democrat.

Representatives from the New Democrats met on Thursday with White House officials, according to a House aide, and later presented a proposal to Mrs. Lincoln. At 9:10 p.m., Mrs. Lincoln returned to the conference committee room after a long absence and huddled with Mr. Dodd, who had voiced fears that the derivatives measure would make it more difficult to retain the 60 votes needed to pass the revised bill through the Senate.

The conference committee also reached substantial agreement on a provision that would exempt auto dealers from the authority of the Consumer Financial Protection Bureau, a major victory for one of the most active lobbying groups on the financial bill in recent weeks and an equally disappointing defeat for the Obama administration.

The White House and the Pentagon had both pushed aggressively for restrictions on companies that offered and promoted auto loans, which military officials said were the cause of numerous complaints of consumer fraud by members of the military and their families.

Republican members of the committee in recent days repeatedly offered amendments that were rejected on party line votes and raised issues that Democrats were little interested in entertaining. Republicans repeatedly faulted the majority for not including an overhaul of the mortgage firms Fannie Mae and Freddy Mac in the financial bill; they also raised objections to the bill’s provisions for unwinding failing financial firms, saying that the bill would not rule out future taxpayer-financed bailouts.

Earlier Thursday, Mr. Frank pushed numerous minor provisions of the 1,500-page financial bill toward agreement.

Among the provisions approved by representatives of both the House and the Senate was one that would give the Securities and Exchange Commission the authority to require stockbrokers to protect their clients’ interest when recommending investments, potentially subjecting brokers to the same fiduciary duty as financial advisers.

Members of the committee from both houses of Congress adopted a proposal that would require the S.E.C. to complete a study within six months of the financial bill’s enactment to evaluate the effectiveness of current rules governing those who give financial advice to or sell securities to consumers.

Under current law, financial advisers are required to act in the best interests of their clients, while brokers are held to a looser standard, under which they are required only to consider whether an investment is “suitable” given the time horizon, goals and appetite for risk of a client.

The compromise calls for the S.E.C. to take the results of the study into account when making any rule, but it also gives the commission the authority to impose a fiduciary standard on stock and insurance brokers. The commission may also require brokers to disclose that they are offering only proprietary products and to reveal how much they are being paid for particular products.

By the end of its work on Friday morning, the House and Senate negotiators had substantially completed work on all of the bill’s 15 titles. Minor work remained on technical amendments that would not substantially change the bill’s provisions.

The Congressional Budget Office estimated that the financial regulatory bill would cost roughly $20 billion over 10 years. The conference committee agreed to pay for the bill by imposing an assessment on large financial institutions; the assessments would be made according to a “risk matrix” that charges higher amounts to riskier institutions.

Mr. Frank said that the assessments — which Republicans called a tax — were an acceptable solution for “the collective errors of many in the financial institutions that caused this set of problems.”