President Obama signed another major piece of legislation today, as Democrats in Congress declare victory in their financial reform fight. What started as a bipartisan initiative to end the risky, and ultimately damaging, Wall Street practices that led to the nation's Great Recession passed with little Republican support. Democrats hope the most sweeping regulatory overhaul of the financial industry since the Great Depression will be one of their banner items heading into the November elections.
It will take time, of course, to see how the more than 2,300-page bill is implemented. Regulators will have discretion in how they write new rules covering a range of activities, from derivatives trading to home mortgage loans. Democrats, led by the bill's sponsors, Connecticut Sen. Chris Dodd and Massachusetts Rep. Barney Frank, say the legislation will accomplish at least two major goals: increasing consumer protection and reducing the systemic risks from some financial practices. [See who in Congress gets the most from the financial industry.]
Last week, Senate Majority Leader Harry Reid secured the 60 votes needed to break a GOP filibuster with the support of three centrist Republicans—Maine's Olympia Snowe and Susan Collins, and Massachusetts's Scott Brown. "It is a better bill than it was when this whole process started," Brown said in a statement, specifically referring to the removal of the $19 billion bank tax, a fix he requested. "It includes safeguards to help prevent another financial meltdown, ensures that consumers are protected, and it is paid for without new taxes." [See who gives the most to Brown.]
The GOP opposition paints the law as overregulation that will cost jobs and hurt the economy. The lone Democrat "nay" came from Wisconsin Sen. Russ Feingold, who said it isn't tough enough. "My test for the financial regulatory reform bill is whether it will prevent another crisis," he said in a statement days before the bill passed in the House on June 30. "[This bill] fails that test." [See where Feingold's campaign cash comes from.]
One standout aspect of the legislation—and one the Democrats are taking to Main Street—is the creation of the Consumer Financial Protection Bureau. The bureau will place safeguards for consumers on banks, mortgage and payday lenders, and other consumer financial businesses that each control more than $100 million in assets. The legislation also creates a Financial Stability Oversight Council to monitor risks in the financial system, and it gives new regulatory powers to the Federal Reserve and to the Securities and Exchange Commission. In addition, the bill restricts risky derivatives trading and implements the so-called Volcker Rule, which limits the amount of their own assets that banks can put at risk in private equity and hedge funds. But the bill includes exceptions that critics worry may reduce its effectiveness.
Some industry officials, like Richard Hunt, president of the Consumer Bankers Association, argue against the urgency of these reforms and note that the bipartisan Financial Crisis Inquiry Commission won't complete its report until December. "This [bill] will be a bad deal for all those involved because we're going to have years of [regulatory] uncertainty," Hunt says. "It's going to limit choices that consumers enjoy today."
The GOP likely will frame the overhaul as an example of the Democrats' big-government overreach. For the party in charge, financial reform adds yet another check mark on the Obama administration's policy agenda.