Why financial reform might not work as intended

The Senate passed financial reform Thursday, and President Obama will sign it, but many of the tough decisions will be made by federal regulators. How they interpret the bill will be key.

Alex Brandon/AP
House Speaker Nancy Pelosi (D-Calif.) (c.) reaches out to Rep. Barney Frank (D-Mass.) (l.) Sen. Christopher Dodd (D-Conn.) (r.) after signing the financial reform legislation bill during an enrollment ceremony on Capitol Hill in Washington Thursday.

Even before the Senate passed sweeping finance reform Thursday, House Republicans – now within range of taking back the majority in fall midterm elections – called for its repeal.

It’s the latest sign of how election-year politics dominated the debate over financial regulation – and how tough it could be to sustain reform over the years it will take for all elements of the law to take effect.

The law, which passed the Senate today by a vote of 60 to 39:

• Sets up an advance warning system for banks deemed too big to fail.

• Ends taxpayer-funded bailouts.

• Imposes new transparency and rules on a $600 trillion unregulated derivatives market.

• Sets new limits on speculation by banks.

• Launches a consumer protection agency with broad powers.

“Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts, period,” said President Obama in remarks at the White House after the Senate vote.

Commenting on House GOP threats to repeal the bill, he added: “I would suggest that American can't afford to go backwards. And I think that's how most Americans feel as well. We can't afford another financial crisis just as we're digging out from the last one.”

Wall Street reform is the second leg of an ambitious three-point legislative agenda that Democrats are rushing to complete by midterm elections. The president signed health-care reform into law March 23. House Democrats passed a climate-change bill in June 2009, but it has since languished in the Senate. Senate majority leader Harry Reid (D) of Nevada is drafting a scaled-down energy bill that he hopes to bring to the floor as early as next week.

Unlike health-care reform, Wall Street reform is broadly popular with American voters. But Republican leaders oppose it as a potential job killer. At the 11th hour, Republican Sens. Susan Collins and Olympia Snowe of Maine and Scott Brown of Massachusetts came to terms with Democrats over “fixes” to the bill, allowing Democrats to break a GOP filibuster today. “This bill would not have happened without them,” said Senator Reid, after the vote.

But the 2,300 page overhaul also requires drafting some 200 regulations, as well as studies and extended timelines before many features of the law take effect. The fight to ensure that the intent of Congress is reflected in regulations could be as protracted as the two-year battle to pass reform.

Responding to charges that Congress had punted all the important decisions to regulators, Sen. Christopher Dodd (D) of Connecticut, who chairs the Senate Banking, Housing, and Urban Affairs Committee, said: “Those are things you cannot legislate: getting good people, committed people, who then in turn hire good people, attract good people to come into these regulatory bodies to do the job.

"I'll plan on having oversight hearings as early as September to bring in the regulatory bodies to ask them exactly what their plans are on how they intend to move forward with the regulatory obligations bill that this bill has imposed,” he added.

Senator Snowe, who agreed to back the bill after concessions for small and seasonal businesses, says that she is considering proposals to ensure that the rules produced by the Treasury Department and agencies to implement the law are in line with such agreements. “The next phase is a regulatory one, and Congress must be sure that that is truly reflective of the legislative intent,” she says.

Public interest groups – a key partner in drafting the finance reform bill – praised the finance reform legislation as providing a strong framework for regulators. “But Congress is going to have to do a better job of oversight than it did over the last eight years [of the Bush Administration], when the regulators aided and abetted [those abusing the system] and Congress let them,” says Ed Mierzwinski, director of consumer advocacy for the National Association of State Public Interest Research Groups (PIRG).

For example, the bid to regulate a highly riskly $600 trillion derivatives market depends critically on how the rules are written and enforced, experts say.

Dodd-Frank sets the contours that have the potential of converting that entire market into a fully transparent and fully capitalized environment. But, dozens of rulemakings, studies, and reports stand in the way,” says Michael Greenberger, a professor at the University of Maryland School of Law.

If “well-funded Wall Street advocacy” wins out in the regulatory process, the bid to clamp down on an unregulated derivatives market could fall short, he adds.

The lobbying for the future of financial reform doesn’t end when Mr. Obama signs the law. In fact, it could be just beginning, as regulators and congressional overseers get down to the business of writing the high-stakes rules.

“This bill represents the most significant overhaul of the financial system since the 1930s. But serious work remains: the proof of the bill’s worth will come not from what is written in the bill, but how the regulators interpret the bill, write the rules and then enforce them,” says John Taylor, president and CEO of the National Community Reinvestment Coalition. “Based on the job they did for the past decade, I will believe reform is here when I see it.”

“By delegating so much to the regulators, Congress is inviting everyone interested in the outcome to make more campaign contributions, as they intervene in the regulatory process to influence the regulators,” says Thomas Ferguson, a professor of political science at the University of Massachusetts, Boston. “Nothing is settled. It’s a gold mine for members of Congress.”


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