Time for Congressional Leaders to Protect ConsumersBy Pat Garofalo | June 1, 2010
The end game of financial reform begins this week in Congress, with the stakes as high for American families as they are for Wall Street’s financial titans. More than a year and a half ago, the financial crisis that spawned the Great Recession began in earnest. The failure of the investment bank Lehman Brothers Co. and the near collapse of the insurance giant American International Group Inc. required the Federal Reserve to engineer multiple rescue packages, but now Wall Street is back to reaping billions of dollars in profits while most Americans are still struggling to recover from the Great Recession.
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While full and complete independence for the new consumer protection regulator is preferable, both bills
match the four criteria that Elizabeth Warren, chairperson of the congressional oversight panel reviewing the government’s rescue of financial firms, has said are critical to the regulator’s success:
■ An independent director
■ Independent source of funding
■ Rule-making authority
■ Enforcement powers
The conferees should fight any attempt to add carve-outs or exemptions for special interest groups or niche financial products (like payday loans).
DerivativesThe Senate’s legislation on derivatives—the complex financial instruments that played a large role in the collapse of many large financial firms, most notably AIG—was authored by Agriculture Committee Chairwoman Blanche Lincoln (D-AR). It mandates that all standardized derivatives be traded on public exchanges (just like stocks are traded currently), and that all customized derivatives go through clearinghouses, which ensure that both parties in a trade have adequate collateral backing it up. There is an exemption from the requirements for nonfinancial companies, but it is not extensive. The controversial Section 716 of the Senate bill would require federally insured commercial banks to spin off their derivatives trading desks, placing them under an independently capitalized subsidiary.
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Ban on proprietary tradingThe Senate’s version of the “Volcker rule,” named after former Federal Reserve Board chairman and current Obama administration financial advisor Paul Volcker, instructs regulators to study whether or not a proprietary trading ban would work in practice and if it would undermine the stability of financial firms, and then design and implement a ban based on the findings. An amendment from Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) that would have institutionalized the ban never came up for a vote and is therefore not on the conference committee’s agenda, but they are
still pushing for it to be included in the conference committee.
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