FACTBOX-Major U.S. financial regulation reform proposals

By Reuters Staff
June 9, 2010

June 9 (Reuters) – Negotiators for the U.S. Senate and House of Representatives will begin on Thursday to hammer out a compromise between two competing bills representing the biggest overhaul of financial regulation since the 1930s.

A House-Senate conference committee must find a middle ground between bills passed by the two chambers. The committee’s final report could differ from earlier versions.

Once approved by both chambers, the compromise legislation will go to President Barack Obama to sign it into law. That could happen by July 4, analysts say.

The Senate bill will be used by the conference committee as its base text. Here are its key elements, how they compare to the House bill, and winners and losers on each issue:

PREVENTING MORE BAILOUTS

* Objective: End the idea that some financial firms are “too big to fail.” Avoid a repeat of 2008, when the Bush administration launched costly taxpayer bailouts of firms such as AIG <AIG.N> but did not bail out Lehman Brothers. Lehman’s subsequent bankruptcy froze capital markets.

Congress wants a middle ground between bailouts and bankruptcy. Firms would have to keep “funeral plans” on file that describe how they could be shut down quickly.

The Senate bill would set up an “orderly liquidation” process that could be used in some emergencies, instead of bankruptcy. The process would let authorities seize large firms in distress and put them in Federal Deposit Insurance Corp. receivership, with liquidation required as the next step.

Shareholders and creditors — not taxpayers — would bear the losses. Management would be removed. The FDIC’s costs would be covered in the short term by a Treasury Department credit line, then recouped by sales of the liquidated firms’ assets and, in case of shortfalls, fees slapped on other large firms.

The House bill would set up a similar FDIC process, except that it would be backed by a $150 billion permanent fund paid into by financial firms whose assets exceed $50 billion.

The House proposes that secured creditors in FDIC actions to dismantle troubled firms could have 10 percent of their claims treated as unsecured, imposing a claims “haircut.”

Both the House’s prepaid fund idea and haircut plan look likely to die in committee, with the Senate plan prevailing.

* Winners and losers: If the new strategy works, the economy will be better protected from financial crises by giving the government better tools to deal with distressed firms. The repurchase agreements market, which is concerned about the haircut provision, would be a winner if it dies.

Big financial firms will likely end up paying new fees.

PROTECTING CONSUMERS

* Objective: Consolidate and improve the government’s fragmented financial consumer protection programs with an eye to cracking down on abusive home mortgages and credit cards.

Both bills would consolidate programs now spread across a half dozen agencies into one watchdog with teeth and a director nominated by the president and confirmed by the Senate.

The Senate makes the new entity part of the Federal Reserve, while the House proposes creating an independent agency.

The Senate’s watchdog would have to answer, in some instances, to a new Financial Stability Oversight Council led by Treasury. The House’s watchdog would have more autonomy.

The House exempts many businesses from watchdog oversight, such as car dealers that do not finance their own lending to their customers. The Senate bill has fewer exemptions.

On another front, the Senate modestly boosts the power of state regulators to enforce consumer protection laws.

* Winners and losers: No matter where the watchdog is located, consumers can expect stronger protections, with credit card and mortgage firms facing tougher rules.

Many senators favor a car dealer carve-out. The Obama administration generally opposes exemptions. Car dealers would win big if they can get an exemption in the bill.

The Senate’s approach to state law will likely stand as a compromise between banks and consumer advocates.

VOLCKER RULE

* Objective: Ban risky trading unrelated to customers’ needs at banks that enjoy government backing; get banks out of the hedge fund business; limit big banks’ future growth.

Obama proposed the rule with his economic adviser Paul Volcker, the former Federal Reserve chairman.

The Senate bill endorses the rule, but calls first for a two-year study and leans on regulators to write the details afterward, leaving the door open to weakening the rule later. Some Democrats are working to add language to the bill giving regulators stricter implementation orders.

The Volcker rule is not in the House bill, though the bill would let regulators bar proprietary trading in some cases.

* Winners and losers: Big banks’ profits would be hurt if the rule is enacted. Banks are working to diminish the damage by carving exemptions into the rule. Volcker opposes these efforts and says his rule would help prevent the next crisis.

Keywords: FINANCIAL REGULATION/

OVER-THE-COUNTER DERIVATIVES

* Objective: Regulate the $615-trillion over-the-counter derivatives market, including credit default swaps like those that dragged down AIG. The market is presently unpoliced.

Both bills propose pushing as much OTC derivatives traffic as possible through more accountable and transparent channels such as exchanges and central clearinghouses.

The Senate bill also would require banks to spin off their swap-trading units, under a provision offered by Senator Blanche Lincoln. Banks oppose this, as do some regulators. The White House has made clear it does not view the Lincoln provision as a high priority. It may be dropped in conference.

The House bill exempts a wider range of end-users from central clearing and excludes Lincoln’s swap-trading “push-out” plan. It also limits swap-dealer ownership in clearinghouses.

* Winners and losers: The government would gain a clearer view of risks posed in the market. Wall Street firms that dominate the market — including Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and Morgan Stanley> — could see their profits cut.

SYSTEMIC RISK

* Objective: Create a new government entity to monitor the financial big picture, spot and head off the next crisis.

Both bills set up a council of regulators chaired by the Treasury. The council could identify firms that threaten financial stability and subject them to stricter policing. The council and the Fed could break up extra-risky firms.

* Winners and losers: Big banks and financial firms would be forced into a tighter regulatory straitjacket. The government would know more about firms that pose a risk and, in theory, be able to stop trouble before it starts.

POLICING BANKS

* Objective: Rationalize the jigsaw puzzle of bank and market supervision to stop troubles from festering in the cracks between a half-dozen different federal agencies.

Both bills do little to address this problem. Fixing it was once seen as vital. But bureaucratic turf fights and pressure from banking lobbyists killed an ambitious Senate reform plan.

Both bills would close the Office of Thrift Supervision.

* Winners and losers: Bankers and existing regulators won this fight by preserving the status quo, except for OTS.

INCREASED CAPITAL REQUIREMENTS

* Objective: Ensure that financial firms have thicker capital cushions to ride out troubled times than they had during the severe 2007-2009 credit crisis.

Both bills call for raising capital requirements on firms as they get bigger and riskier. But neither spells out much detail, leaving it up to regulators — with two differences.

First, the Senate bill has an amendment from Republican Senator Susan Collins that would make bank holding companies adhere to the same capital standards as bank subsidiaries.

Under the measure, bank holding companies could no longer count trust-preferred securities and other hybrids as Tier One capital, a key measure of a bank’s strength.

The Collins amendment reflects a push to standardize capital calculations under way in the global Basel rule-making process for accounting standards. It is supported by Sheila Bair, the chairman of the Federal Deposit Insurance Corp, but opposed by the Treasury and the Fed.

It could force some firms to raise additional capital, and bank lobbyists will work hard in conference to kill it.

Second, the House bill sets a hard cap of 15-to-1 leverage for large firms that pose systemic risk. The Senate bill requires the Federal Reserve to develop leverage requirements.

* Winners and losers: Most U.S. firms have already boosted their capital since the crisis and should be able to meet higher standards. But the Collins amendment could be hard on Capital One and M&T Bank, analysts say.

EXECUTIVE PAY AND SHAREHOLDER RIGHTS

* Objective: Give shareholders more say on executive pay and more clout in electing directors.

Both bills back these changes.

* Winners and losers: Corporate managers could lose their stranglehold on the director nomination process. Shareholders could gain more say on pay, but it would largely be symbolic.

REGULATING HEDGE FUNDS

* Objective: Expose hedge funds and other alternative investment vehicles to more government oversight.

Both bills require hedge funds to register with the government and open up to more scrutiny.

The House bill calls for registration of hedge funds worth $150 million or more; the Senate’s threshold is $100 million.

The Senate bill exempts venture capital funds and private equity funds. The House bill exempts venture capital funds from full registration while requiring offshore funds to register. The Senate bill does not do this.

* Winners and losers: Regulators would gain a window into a murky market. An estimated 55 percent of hedge funds are already registered. Those that are not would have to do so. Keywords: FINANCIAL REGULATION/

FIXING SECURITIZATION

* Objective: Make the securitization market for mortgages and other debt more transparent and accountable.

Both bills force securitizers to keep a baseline 5 percent of credit risk on securitized assets. More disclosure is required for securitized debt instruments.

The Senate would exempt securitizers that take steps to ensure their loans meet standards that reduce risk.

* Winners and losers: Investors in securitized products would be better protected. Securitizers — from lenders to Wall Street bundlers — face stricter oversight and higher costs.

CREDIT RATING AGENCIES

* Objective: Increase the accuracy of credit ratings used by investors to judge debt-offering risks and boost oversight of for-profit firms that issue these ratings.

The Senate bill would upend the industry’s business model in which borrowers pay fees to the agencies to rate their debts.

The bill would create a panel to match rating agencies on a semi-random basis with debt issuers. The goal would be to ease pressure on the agencies to assign overly rosy ratings. The panel would examine ratings, foster competition, expose raters to more legal risk, and reduce mandates for unneeded ratings.

The House bill would not set up a panel to stand between between debt raters and debt issuers.

* Winners and losers: Major rating agencies — Moody’s Corp, Standard & Poor’s and Fitch Ratings — would face stricter oversight and more competition. If it works, the rule could make credit ratings more credible.

DEBIT AND CREDIT CARDS

* Objective: Reduce fees that card issuers charge consumers and merchants.

The Senate bill would enable regulators to limit the fees that card issuers charge merchants for debit-card transactions. Merchants could also encourage customers to use one kind of card over another, or to pay by cash or other means. The House bill does not limit these fees.

* Winners and losers: The fee limits in the Senate bill are a victory for merchants and a defeat for big card firms such as JPMorgan Chase, MasterCard Inc and Visa Inc.

Financial industry lobbyists are fighting hard to kill the fee limits in conference.

FED SCRUTINY

* Objective: Shed more light on the Federal Reserve.

The Senate bill would expose the Fed’s emergency lending during the crisis to a one-time congressional investigation. The Fed would have to disclose the names of those it assisted.

The House bill would extend congressional scrutiny to Fed decisions on interest rates.

* Winners and losers: Longtime critics who have criticized the Fed’s secrecy can claim victory. Fed officials oppose the more intrusive oversight provisions passed by the House but have said they can live with the Senate version.

FIDUCIARY STANDARDS

* Objective: Hold brokers to the same standard of client care observed by investment advisers, ending a long-standing disparity that investor advocates say is unfair.

The House bill would make this change, forcing brokers who give financial advice to respect a “fiduciary duty” to act in their clients’ best interest as advisers do. Brokers now must only ensure a financial product is suitable for a client.

The Senate bill calls for another study of the issue.

* Winners and losers: Big brokerage houses would have to change their approach under the House bill, while the Senate bill would preserve the status quo for now.

FDIC FEES

The Senate bill would change how the Federal Deposit Insurance Corp sets deposit insurance premiums to a new calculation favoring smaller banks and charging big banks more. The House bill does not change the present system.

* Winners and losers: Big banks would pay more, while small banks would pay less under the Senate language, which is seen as likely to prevail in conference.

INSURANCE

Both bills would set up a new federal office to monitor, but not regulate the insurance industry, which is now policed at the state level.

Winners and losers: The industry is divided on the issue of federal oversight. The reforms appease opponents of more centralized regulation by keeping real power out of Washington’s hands, while giving big insurers that want a single regulator a possible foothold to use in the future. (Reporting by Kevin Drawbaugh; Editing by Leslie Adler)

((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax)))

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