Business World

Thursday 23 February 2017

US Senate passes Wall St reform bill

Alison Vekshin and Phil Mattingly

The US Senate has approved a bill that imposes restrictions on proprietary trading by banks and creates a consumer protection agency designed to prevent lending abuses that triggered the housing collapse and the worst unemployment in almost three decades.

The legislation, approved by a 59-39 vote yesterday and requiring reconciliation with a bill passed by the House of Representatives in December, provides a mechanism for liquidating financial institutions, until recently considered too big to fail, a council of regulators monitoring threats to the economy and specific restraints on the trading of so-called derivatives, which spawned the toxic debts that seized up the credit markets in 2007 and 2008 and prompted the Federal Reserve to make trillions of dollars of loans to banks on the brink of insolvency.

“When this bill becomes law, the joyride on Wall Street will come to a screeching halt,” Senate Majority Leader Harry Reid, a Nevada Democrat, said after the vote.

Prohibiting financial institutions from trading derivatives -- contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather -- is especially controversial and opposed by Wall Street lobbyists and by some regulators, including Fed Chairman Ben Bernanke.

The proposed consumer protection bureau, which the Senate has placed inside the Fed, would have powers to write and enforce rules banning lending considered abusive.

$150bn fund

House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat who shepherded a financial-overhaul bill through his chamber last year, said in an interview yesterday that he intends to make sure final legislation has a free-standing Consumer Financial Protection Agency, reflecting President Barack Obama’s original proposal.

Negotiators will have to reconcile differences over a pre-paid $150bn fund created by the House bill to cover the government’s cost of unwinding a failing financial firm.

The Senate bill requires the industry to repay the government only after a company collapses. Frank said yesterday he wouldn’t push to keep the industry-financed pre-paid fund in the bill.

“The two bills are very similar, and the House is ready to go to conference to work out the remaining issues,” Frank said in a statement. “I am confident that we can have a bill ready for President Obama’s signature very soon.”

Wall Street bailout

Congressional Democrats moved to change regulation of US financial companies after taxpayers provided $700bn in emergency loans to rescue the insurer American International Group, mortgage lenders Fannie Mae and Freddie Mac, and Citigroup, following the forced takeover of Bear Stearns by JPMorgan and the collapse of Lehman Brothers, the biggest bankruptcy in US history.

The unprecedented bailout of Wall Street was the culmination of the worst housing market since the 1930s, precipitated by so-called subprime mortgages, which were packaged by Wall Street derivatives specialists into toxic fixed-income securities, known as collateralised debt obligations, and sold to investors worldwide.

After credit markets froze in 2007, the unemployment rate in the US surged to 10.1pc during the next two years from 5pc before the recession began. It remains at 9.9pc.

Republicans criticised the Senate bill, saying it failed to deal with government-sponsored enterprises Fannie Mae and Freddie Mac, which were seized by the government in 2008.

The Republicans also said the consumer financial protection bureau the bill would establish amounts to a massive new bureaucracy.

“We hope that we have a conference where we all are participants and that we’re dealing with trying to reconcile the bill section-by-section and come out with a good piece of legislation, but we’ll have to see about that,” Senator Richard Shelby, the banking committee’s top Republican who voted against the bill, said about the House-Senate talks.

Bloomberg

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