Friday, May 21, 2010

Watch Out, Wall Street

Yesterday, the Senate passed legislation, by simple majority, to reform and better regulate Wall Street and the national financial system and avoid another financial meltdown such as occurred in 2008 by a vote of 59 for, 39 against. The restraints passed are said to have the most far-reaching effects on big banks since the Great Depression and also represent an important legislative victory for President Obama, fresh off the heels of the health care reform overhaul.

With 4 Republicans - Sens. Scott Brown (R-MA), Susan Collins (R-ME), Chuck Grassley (R-IA), and Olympia Snowe (R-ME) - defying their party and joining all but 2 Democrats - Sens. Maria Cantwell (R-WA) and Russ Feingold (R-WI) - in voting for the bill, it also represents a minor milestone in Obama’s attempt to foster a bipartisan Washington. It seems that legislators are slowly becoming more comfortable voting their conscience as opposed to the party caucus decision.

The only difficulty will be reconciling the House and Senate financial reform packages, with the Senate containing provisions that are actually stricter than those from the House, despite the balancing act required in the Senate to garner votes. The major goal is to incorporate many of the Senate’s stronger measures without losing the support of any swing voters in either the Senate or the House.

The most talked about point of contention will be the derivatives title, with the Senate’s essentially requiring financial firms to spin off their swaps desks into separate companies in order to create more transparency in the derivatives trading market. The House version barely addresses the issue of derivatives, thanks to a strong lobbying efforts which resulted in many loopholes for various industry players. The bill will also contain better measures for more easily liquidating ‘too big to fail’ firms when they actually do fail. Hopefully, the final bill will also contain the audit provision which calls for a thorough audit of the Federal Reserve along with the creation of a new government agency, charged with protecting consumers from financial malpractice.

As for complaints, there are plenty. Wall Street feels threatened, as would be expected, with JPMorgan Chase Chief Executive Jamie Dimon issuing the following statement:

“With the events in Europe and constantly changing proposals in Washington, global markets are in need of certainty. The U.S. should take the approach of passing sensible derivatives reforms based on facts and analysis.”

However, it seems that Wall Street is being a little selfish, as some would have the banks suffering much more. Cantwell and Feingold dissented from their party and voted against the bill because they felt the restraints did not go far enough to address the root causes of the prior financial meltdown. Feingold released the following statement addressing her concerns:

"The bill does not eliminate the risk to our economy posed by 'too big to fail' financial firms, nor does it restore the proven safeguards established after the Great Depression, which separated Main Street banks from big Wall Street firms and are essential to preventing another economic meltdown. The recent financial crisis triggered the nation's worst recession since the Great Depression. The bill should have included reforms to prevent another such crisis. Regrettably, it did not."

Despite what the bill is lacking, it represents important progress that has been needed for years. It is reversing years of legislative loosening that provided banks and other firms with so much freedom that the market began to resemble something close to anarchy. It is also a major accomplishment as midterms creep up, and provides Obama with an argument for why Democrats should stay in power in Congress. Finally, it is nice to see at least some delivery on the promise of bipartisanship on such major legislation. Hopefully, this legislation will be the fix everyone is looking for.

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