Nearly two years have passed since Wall Street caused an economic meltdown, and Congress has finally produced a bill that would help reform the financial industry.
The legislation forged by House and Senate negotiators contains much of what’s needed to curb the industry’s most reckless practices. It would regulate the huge market in over-the-counter derivatives such as “swaps.”
The bill establishes a needed consumer-protection agency for financial products, with the authority to oversee everything from mortgages to credit cards to payday lenders. Consumers lost a battle when lawmakers decided to house the new bureau within the Federal Reserve, but it will be run by an autonomous director with independent funding.
The new agency should go a long way toward reducing the tricks perpetrated through credit-card agreements and bank fees that have helped to keep too many consumers mired in debt.
Investors would gain a victory through the bill’s imposing a fiduciary duty on brokers when they give investment advice. And the bill would create a new advocate for investors within the Securities and Exchange Commission.
The legislation attempts to get at the problem of financial institutions deemed “too big to fail,” which produced so much of the public anger at bailouts in 2008.
It gives federal regulators the tools to shut down large banks instead of exposing taxpayers to more risk. Even so, some huge banks are left intact and vulnerable to the same bad habits that got them into trouble.
This deal nearly unraveled when Sen. Scott Brown (R., Mass.) objected to a proposed tax on big banks to pay for the cost of regulation. The conference committee hurriedly killed the tax, instead raiding the bailout fund to help pay for it. It was a dubious move, but it doesn’t negate the need for this legislation. But final passage of the measure is at risk due to the death of Sen. Robert Byrd (D., W.<TH>Va.).
If passed, the legislation’s effectiveness will depend on how it’s carried out. Take the so-called “Volcker rule.” Former Fed Chairman Paul Volcker, now an adviser to President Obama, proposed a ban on risky proprietary trading by commercial banks so that taxpayers won’t end up on the hook.
Congressional negotiators allowed banks to invest up to 3 percent of their capital in such ventures. Regulators will need to keep a close watch on banks’ investment practices. Most derivative transactions would be required to take place on regulated exchanges, rather than privately. The challenge will be to prevent the hidden share of this market from growing ever larger.
Banks could make less money because of these efforts to limit their risk-taking. But they brought this needed regulation on themselves with reckless practices such as writing undocumented loans and trading financial instruments even they didn’t understand.
This legislation does contain loopholes — for example, an exemption for car dealers from the new consumer-protection bureau. But on the whole, it’s a necessary response to the financial disaster that is still spreading pain through the economy. Congress should approve the final version now and send it to the president.