The toughest financial regulations since the Great Depression are headed for final votes in Congress next week, covering everything from debit card swipes at Starbucks to the most complex securities, in an election-year salve for public anger over the Wall Street risk-taking that cost millions their jobs, homes and nest eggs.
House and Senate bargainers approved the deal as the sun rose Friday, giving President Barack Obama a fresh campaign-season triumph after his health care overhaul — and an achievement to tout at the weekend global economic summit in Toronto. Democrats hope lawmakers can pass the legislation and ship it to Obama for his signature by July 4, capping a burst of action prompted by the worst recession in seven decades.
The legislation creates a new federal agency to police consumer lending, set up a warning system for financial risks, force failing firms to liquidate and map new rules for instruments that have been largely uncontrolled.
Leaving the White House for Toronto, Obama said the package will "help prevent another financial crisis like the one that we're still recovering from."
Financial analysts, however, gave it mixed reviews. Some said banks would simply find new ways to make money by getting around the rules and establishing new fees.
While reining in banks and setting new rules for high finance, the legislation also reaches down to some of the most commonplace consumer transactions.
The Federal Reserve will have to set new limits on the fees banks charge merchants who accept debit cards. Retailers, who would stand to save billions in payments, would be able to offer customers reduced prices for debit card use. Banks said the limits could simply shift costs to other banking products.
Lenders would no longer be able to make a loan without verifying that the borrower can repay it. They would have to disclose the maximum amount that borrowers could pay on adjustable-rate mortgages and they would be barred from receiving incentives to push homebuyers into high-priced loans.
Aside from the sweep of the legislation, the agreement gives the president another signature achievement just three months after he pushed a reshaping of the nation's health care system through Congress. With deep public hostility toward Wall Street and the government bailouts that helped rescue them— an Associated Press-GfK Poll this month found that 79 percent blame banks and lenders for the economic problems — Democrats can only hope the measure will help them cling to their congressional majorities in the November elections.
Hoping to latch on to populist anger, House Speaker Nancy Pelosi, D-Calif., said the law sends a clear warning that Wall Street recklessness won't be allowed to spread joblessness across the country. The Consumer Federation of America said the package would "improve the marketplace for consumers and thereby improve the stability of our economy."
Even so, the measure's political impact is unclear. In the AP-GfK Poll, 7 in 10 also blamed lax federal regulation for the recession, 6 in 10 blamed people who couldn't afford their loans, and nearly two-thirds doubted the legislation would ward off a future downturn.
The legislation was not without its critics. Republicans complained that it ignored their efforts to impose tighter restrictions on Fannie Mae and Freddie Mac, the mortgage giants who have benefited from huge federal bailouts and whose questionable lending helped trigger the housing and economic meltdowns.
"Democrats have crafted a bill that fails to address the origins of the crisis and will not prevent a replay of events in the future," said Rep. Tom Price, R-Ga., a member of the House GOP leadership. He said the measure would hinder economic growth and hurt consumers by limiting their access to credit.
Vikram Pandit, CEO of the financial giant Citigroup, said he hopes the measure "will provide direction and stability for the financial system going forward." Some analysts said investors were relieved to know the new rules didn't end up being even harsher.
"It clears the playing field a little bit so at least you know what you're up against and you can start to plan around that," said Jim Dunigan, managing executive of investments for PNC Wealth Management in Philadelphia. "The no man's land that they were in while they were crafting the final bill left too much uncertainty."
In a number of ways the bill was tougher than what the Obama administration initially requested from Congress. But securing the votes of moderate Democrats in the House and a handful of Republicans in the Senate also meant softening some provisions in the bill.
Bowing to the lobbying might of the nation's 18,000 auto dealers, negotiators agreed to exempt car sellers from the oversight of the new Consumer Finance Protection Bureau created by the legislation.
Unable to agree on legislative restrictions, lawmakers decided to simply require a Securities and Exchange commission study of how to make stockbrokers more accountable for the advice they give clients.
Lobbyists toned down provisions in the bill that:
- Require bank holding companies to spin off their derivatives business into self-funded subsidiaries. Banks would be allowed to keep less risky derivatives operations.
- Set new standards for what banks must keep in reserve to protect against losses. Lobbyists carved out a grandfather exception for banks with assets of less than $15 billion.
- Adopted the Obama administration's so-called "Volcker Rule," named after its chief advocate, former Federal Reserve Chairman Paul Volcker. Commercial banks would not be permitted to trade in speculative investments. But negotiators agreed to let them invest in hedge funds and private equity funds, setting an investment limit of no more than 3 percent of their capital.
Large U.S. banks and foreign banks with operations in the United States are already evaluating what operations they can move abroad to avoid stricter U.S. regulation on their operations, analysts said Friday.
Nations in the 16-nation Eurozone are seen as unlikely to benefit because the European Union is expected to come up with its rules for a government crackdown on risk-taking bankers in hope of warding off additional expensive bailouts. Asia, with a looser regulatory environment and a business-friendly reputation, could benefit more.