By David Cho, Jia Lynn Yang and Brady Dennis
Washington Post Staff Writers
Saturday, June 26, 2010; A01
Nearly two years after tremors on Wall Street set off a historic economic downturn, congressional leaders greenlighted a bill early Friday that would leave the financial industry largely intact but facing a more powerful network of regulators who could impose limits on risky activities.
The final bill took shape after a 20-hour marathon negotiation between House and Senate leaders seeking to reconcile their separate versions. The legislation puts a lot of faith in the watchful eye of regulators to prevent another financial crisis. New agencies would police consumer lending, the invention of financial products and the trading of exotic securities known as derivatives. Bank supervisors would have the power to seize large, troubled financial firms whose collapse could threaten the entire system. The bill calls for banks to hold more money in reserve to weather economic storms but leaves the details to regulators.
But with a few exceptions, the measure avoids dictating to Wall Street what it can and cannot do. The bill does not break up big banks or ban the trading of derivatives. Nor does it significantly streamline the confusing array of financial regulators in Washington.
The House and Senate are set to vote on the legislation next week, and administration officials said President Obama could sign it into law before July 4.
The action capped a surprisingly good week for Wall Street. On Thursday, Democrats failed to pass a separate bill that would have raised taxes on some of the country's wealthiest financiers. On Friday, stocks of financial firms jumped when trading opened in New York. Many analysts said the markets breathed a collective sigh of relief that the regulatory reform talks were over and that the results could have been much worse for the financial industry.
One firm that is likely to face more oversight is Goldman Sachs, which has become emblematic of the excesses of Wall Street. Regulators would more carefully track the firm's riskiest activities. In the coming year, a regulatory council could force the bank to shed its sizable hedge funds and private-equity activities. It also could be banned from making financial trades for its own profit instead of for clients, shaving roughly 10 percent from the firm's revenue. But after those changes, Goldman Sachs and a few other financial titans will still dominate the financial system, the analysts said.
A flurry of dealmaking allowed several industries to escape the new system. At the last minute, auto dealers were granted exemptions from new consumer rules, despite their major role in lending. Most mutual fund and insurance companies avoided a ban on some risky trading. Community banks, which make up the vast majority of their industry, got a carve-out months ago.
Still, the deal reached a few minutes before dawn Friday all but ensures that Obama will see his second major legislative achievement of the year, after health care, Democrats said. It also gives the president momentum as he presses major economies in Europe and Asia to make similar changes at an economic summit in Toronto this weekend.
"We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression," Obama said at the White House, adding that the bill "represents 90 percent of what I proposed when I took up this fight . . . We've all seen what happens when there is inadequate oversight and insufficient transparency on Wall Street."
Asked whether he expected the compromise legislation to pass the full Senate -- which approved an earlier version, 59-39 on May 20, with support from four Republicans -- Obama replied, "You bet."
Republican lawmakers who serve on congressional financial panels blasted the compromise bill. "This legislation is a failure on both counts," Sen. Judd Gregg (R-N.H.) said in a statement. "It will not encourage much-needed stability and confidence in our financial markets. It will not significantly reduce systemic risk in our financial sector."A flurry of change
The bill's final passage would set off a rush of activity. Two long-standing bank regulators would be combined, and regulators would have to launch more than 20 studies on controversial topics such as limiting the risky activities of big financial firms and setting precise capital reserve standards for banks.
Some administration officials acknowledged that leaving so much decision-making in the hands of regulators could open the process to lobbying by the financial industry. Many bank supervisors, in fact, work inside the headquarters of the biggest financial firms and have close relationships with the executives of the companies they regulate.
Among the first tasks for the administration would be to set up a new consumer protection bureau that would monitor credit card companies, mortgage brokers and banks to make sure consumers have clear information about financial products. The new agency, while housed in the Federal Reserve, would have its own budget and director appointed by the president and would have wide authority to write consumer protection rules and enforce them with civil penalties. It could, for instance, force mortgage lenders to be more upfront about possible interest increases in adjustable-rate loans. During the crisis, many borrowers were caught off guard by the rise in rates on such loans.
The wee hours of Friday morning brought about the final and most arduous compromises between lawmakers in reconciling the chambers' two versions of the bill.
Sen. Blanche Lincoln (D-Ark.) agreed to scale back a controversial provision that would have forced the nation's biggest banks to spin off their lucrative derivatives-dealing businesses. The proposal had been a particularly thorny issue for Democrats, causing internal divisions that threatened to derail the entire process.
Administration officials and Democratic leaders worked fervently to bridge the divide between Lincoln and a bloc of House Democrats that opposed the provision, especially those from New York, where much of the derivatives industry is concentrated. Finally, the two sides agreed to allow banks to hold onto derivatives related to traditional banking operations such as interest rates, currency rates and gold and silver. Banks would have to move their riskiest derivatives trades into an affiliate that must have its own capital reserves. The Senate agreed to the compromise language just after 2:30 a.m.'Volcker rule'
The conference panel also strengthened the "Volcker rule," named after former Federal Reserve chairman Paul Volcker. That measure would bar banks from trading with their own money, a practice known as proprietary trading. In reaching this deal, negotiators adopted a provision that would ban certain forms of proprietary trading and forbid firms from betting against securities they sell to clients.
Under the agreement, firms would have up to two years to scale back proprietary trading and investments in hedge funds and private-equity funds. Banks also would be barred from betting against their clients on certain investments.
Even as they worked to toughen the Volcker language, lawmakers agreed to an exemption at the behest of Sen. Scott Brown (R-Mass.), one of the four Republicans who voted for the earlier version of the bill. Brown, whose state is a hub of the asset-management industry, wanted the bill to allow banks to invest at least a small amount of capital in hedge funds and private-equity investments. The measure would prohibit a bank from placing more than 3 percent of its capital in such investments. It was one of a number of provisions tailored to hold onto key votes as the bill heads toward final passage.
The cavernous Dirksen 106 conference room remained packed as dawn approached, but it was a chaotic and cluttered mass of humanity. Lawmakers had stopped trying to conceal their yawns. Aides who had worn down their BlackBerry batteries recharged them for the home stretch. Trash cans spilled over with coffee cups and sandwich wrappers. Empty Fritos bags and plastic Diet Coke bottles littered the room, along with reams of paper: old amendments, new amendments, handwritten amendments, amendments to amendments.
Weary lawmakers wrapped up their work minutes before sunrise.
"It's a great moment. I'm proud to have been here," said a teary-eyed Sen. Christopher J. Dodd (D-Conn.), who as chairman of the Senate Banking Committee led the effort in the Senate. "No one will know until this is actually in place how it works. But we believe we've done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done."
One of the last motions Friday was to name the bill after the two chairmen, Dodd and Rep. Barney Frank (D-Mass.), who had shepherded the legislation through the House over the past year. At 5:07 a.m., they agreed unanimously that it would be known as the Dodd-Frank bill, and the sound of applause echoed down the empty hallways.