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Financial bill to rein in Wall Street. Will it be tough enough?

Regulations in a House financial bill would mean the most significant overhaul of the financial-services industry since the New Deal.

By Staff writer / December 2, 2009

US Representative Barney Frank (D-MA) holds a news conference on issues before the House Financial Services Committee on Capitol Hill in Washington, Wednesday.

Jonathan Ernst/Reuters

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Washington

A year after a near collapse of the financial system and a historic $800 billion taxpayer bailout, Congress is reworking its terms of engagement with Wall Street.

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The stakes for the financial sector couldn’t be greater. After years of relatively little regulation, Congress is considering the most significant overhaul of the industry since the New Deal on issues ranging from executive salaries and transparency for derivative trades to new powers for federal regulators to break up companies deemed “too big to fail.”

But despite the fact that the financial services industry is a virtual ATM machine for congressional campaigns, the legislation on track in Congress has Wall Street on the defensive. Financial interests won important exemptions in committee, but consumer groups rallied support to remove them on the floor.

The House Financial Services Committee today passed the last leg of a comprehensive reform package to ensure that massive financial firms never again threaten a system-wide crisis -- or require taxpayers to bail out “Wall Street’s reckless actions,” as the congressional panel put it.

The bill empowers an inter-agency oversight council to identify and more strictly regulate financial firms posing a systemic risk to the system -- powers that federal authorities did not have when faced with the collapse of American International Group Inc. (AIG) or Lehman Brothers in 2008.

Sweeping regulatory powers

It also gives federal regulators sweeping powers to force companies deemed too large and interconnected to downsize, even if the firm is well capitalized. The costs of shutting down a failing financial company will be borne by shareholders and creditors, rather than taxpayers, as in the case of AIG. The largest groups -- companies with assets of more than $50 billion and hedge funds with assets of more than $10 billion -- will be required to pre-fund a “dissolution fund” to cover any shortfall.

It’s just the beginning of hard negotiations within the Democratic caucus over how far to push the financial services industry, while not alienating a liberal base looking for stronger consumer protections.

The House Financial Services Committee aims to come to the floor next week with an omnibus bill that wraps in eight other reform bills on issues ranging from creating a clearing house for derivatives like credit default swaps to creating a new consumer protection agency. Legislation on subprime lending and executive compensation that have already been passed by the House will be included in the final package.

“We have spent more than 50 hours debating this legislation and several hundred amendments,” said Rep. Barney Frank (D) of Massachusetts, who chairs the panel. He says that he expects at least three days of floor debate on some 10 “significant amendments.”

More oversight for the Fed?

The chairman wants the House to strip out a bipartisan amendment that mandates more oversight of the Federal Reserve -- a move that Fed chairman Ben Bernanke says will expose monetary policy to “short term political influence.” In response to concerns from consumer groups, Rep. Frank also aims to narrow exemptions that some groups, such as auto dealers, won during the committee markup.