Financial Regulatory Forum

PREVIEW-Wall St. reform’s final round in U.S. Senate

By Reuters Staff
May 17, 2010

By Kevin Drawbaugh

WASHINGTON, May 17 (Reuters) – The Wall Street reform fight enters its final stages in the U.S. Senate this week with an overdue reckoning on three issues that cut to the heart of how, and for whom, the financial system works.

Although a final vote is expected within days on the White House’s top domestic priority, lawmakers have yet to settle disputes on regulating over-the-counter derivatives; curbing risky trading by banks; and the power of state authorities.

There will need to be resolution on these topics before the Senate can approve a massive Democratic bill designed to make the financial system less prone to crises like that of 2007-2009.

Analysts say that could occur as soon as Wednesday or Thursday. Delays could postpone full approval to next week, however.

Major votes on amendments looked unlikely on Monday or Tuesday, due to primary elections involving senators Blanche Lincoln and Arlen Specter, both Democrats. Party leaders were expected to avoid close votes on controversial measures while the two were away on the campaign trail.

The bill aims to prevent the kind of financial turmoil that tipped the U.S. economy into deep recession in 2007, and which academics say has become more common since a wave of deregulation in the 1980s.

For President Barack Obama, the stakes are high. He is a staunch advocate of tighter rules for banks and capital markets following the crisis, the worst in decades, and the politically explosive taxpayer bailouts of Wall Street that ensued.

Whatever the Senate produces will have to be merged with a reform bill approved in December by the U.S. House of Representatives. The process of putting the two together could run into late May or June. It will be another opportunity for changes to the package. Once a final bill is agreed on, it would then be sent to Obama to be signed.

As drafted now, the bill threatens to constrain the banking sector’s future profitability for years to come. While it has become more onerous in recent days from the banks’ point of view, it still weighs only on the profit outlook and does not fundamentally change the industry’s business model.

That could change, depending on the outcome of the three key issues that still have to be decided.

OTC DERIVATIVES A KEY QUESTION

First is what to do about regulating the $600-trillion over-the-counter derivatives market, now unpoliced by the government. To its critics, this opaque bazaar of complex swap contracts can resemble a casino more than an adjunct to efficient capital allocation. A crackdown is needed, they say.

Defenders of the market say it serves a vital role by helping corporations manage risks that range from changing jet fuel prices to foreign currency fluctuations. Tinkering too much with it could drive the market deeper into the shadows and put U.S. businesses at a competitive disadvantage, they say.

A handful of mega-firms dominate the market: Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley, Bank of America and Wells Fargo. They are fighting hard to protect the profits they make from it.

At a minimum, analysts expect much of the market will be redirected into more visible and accountable channels such as exchanges, electronic trading platforms and central clearinghouses. But will the banks be barred from the table?

That’s the big question as the Senate considers a proposal from Lincoln that would force big banks to separate swap-trading desks from their main business operations. Bank lobbyists are pushing for the provision to be dropped.

‘VOLCKER RULE’ STILL UNDECIDED

A second major issue is how to restore at least some of the firewalls that once shielded deposit-taking banks from the turbulence of trading and investment banks. Those walls fell years ago in a spurt of deregulation that unleashed banking’s worst instincts, according to critics.

The industry says large, diversified banks are needed and that it would be unrealistic and unwise to break them up or otherwise tie their hands in a range of markets.

Look for a solution, analysts say, that embraces the gist of the “Volcker rule,” proposed in January by Obama and White House economic adviser Paul Volcker. It would bar banks from doing proprietary trading for their own accounts, get them out of the hedge fund business and limit their future growth.

The third big issue is the so-called Eliot Spitzer question — if federal bureaucrats are doing too little to police banking and finance, should state officials’ get more clout?

The Senate bill drafted by Democrat Christopher Dodd would give state officials more latitude in enforcing consumer protection laws involving big banks. Industry lobbyists are pushing the other way — for more centralized bank consumer protection power in Washington, and less in state capitals.

The outcome looks uncertain, analysts say, with banks’ future compliance costs in the balance.

The industry took two blows last week. The Senate approved amendments aimed at curbing credit and debit card fees, and at shaking up the credit rating agency industry. Both amendments surprised analysts and threw lobbyists onto the defensive.

(Editing by Andrew Hay)

(Additional reporting by Andy Sullivan and Charles Abbott) ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax)))

Comments
One comment so far | RSS Comments RSS

Does anyone know whether or not the 0.25% tax on all equity Buy Trades(2/21/09 WSJ) is still included in the Finance Regulatory Reform Bill.

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