Financial reform law: What's in it and how does it work?
President Obama signed a sweeping financial reform bill into law Wednesday giving the federal government new powers to regulate Wall Street.
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• Breakup authority. Federal regulators will have the power to seize and dismantle troubled financial firms whose collapse might pull other companies down as well. This resolution authority would be overseen by the Federal Deposit Insurance Corporation. Taxpayers would pay for upfront costs but regulators would then be required to recoup the money by levying fees on financial firms with more than $50 billion in assets.Skip to next paragraph
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• Tighter leash for financial firms. The bill establishes tight restrictions on the ability of banks to trade in financial markets with their own funds. Proprietary trading – when banks place market bets for their own profits, instead of their customers – will be banned. Banks will be able to invest sums equal to only 3 percent of their capital in hedge and private equity investment instruments. In addition, the complex financial risk swaps known as derivatives will face comprehensive regulation for the first time. Most will have to be traded through public clearinghouses or exchanges.
• Mortgage reforms. In the years leading up to the financial meltdown it seemed as if banks and other financial firms would give a mortgage to any person with a pulse. Those loose practices are supposed to end, under the terms of the financial overhaul bill. Banks and other financial companies must review the income and credit histories of mortgage applicants, to ensure they can afford payments. Firms that bundle mortgages into pooled investment instruments must keep at least 5 percent of these instruments on their books. This is intended to serve as an incentive for the firms to make solid loans – not questionable ones that are then dumped entirely on outside investors.
The bill does not address the problems of Fannie Mae and Freddie Mac, the large government-sponsored corporations that are at the heart of the nation’s mortgage system. The federal government had to bail out these firms when their investments soured, to the tune of $145 billion in taxpayer funds so far.
This is a major omission, to some critics of the legislation.
“Rather than fix the endless bailout that Fannie and Freddie have become, Congress believes it is more important to expand federal regulation and litigation to lenders that had nothing to do with the crisis,” writes Mark Calabria, director of financial regulation studies at the Cato Institute, in his analysis of the bill.
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