Provisions of the negotiated financial reform bill

The Associated Press reports the provisions of the negotiated financial reform bill.

(emphasis mine) [my comment]

Provisions of the negotiated financial reform bill
By The Associated Press (AP) — 3 hours ago

Some highlights of the compromise legislation to overhaul financial rules:

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OVERSIGHT

A 10-member council would monitor threats to the financial system. It would decide which companies were so big or interconnected that their failures could upend the financial system. Those companies would be subject to tougher regulation.

If such a company teetered or posed a threat, the council could close it. The bill calls for taxes on the banking industry to cover the costs of doing so.

The council would be led by the Treasury secretary. Other members would include: the Federal Reserve chairman, bank regulators, the head of a new consumer financial protection agency and an insurance expert appointed by the president.

The council could overturn new rules proposed by the consumer protection agency. That's supposed to happen only to rules deemed a threat to the financial system.

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CONSUMER PROTECTION

A new independent office would oversee financial products and services such as mortgages, credit cards and short-term loans. The office would be housed in the Fed. A new force of on-site examiners would enforce the rules.

But not everywhere. Auto dealers, pawn brokers and others would be exempt from the bureau's enforcement. For community banks, the new rules would be enforced by existing regulators.

Regulators could block rules proposed by the consumer agency. They would do so if they felt a rule could weaken banks.


Currently, consumer protection is spread among various bank regulators. Non-bank companies that offer loans are barely regulated.

State consumer laws would apply to financial companies — unless federal regulators voted to block them on a case-by-case basis. Under the current system, state rules don't apply to national banks. Some states' consumer protection laws are tougher than the federal standard that applies to national banks.


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FEDERAL RESERVE

The Federal Reserve would continue supervising two types of financial companies: bank-holding companies and state-chartered banks that are members of the Fed system.

The Fed would lead oversight of big, interconnected companies whose failures could threaten the system. Those companies would be identified by the council of regulators.

If the council voted to close such a company, the Fed would run that process.

The Fed's relationships with banks would face more scrutiny from the Government Accountability Office, Congress' investigative arm. The GAO could audit emergency lending by the Fed after the 2008 financial crisis emerged. It also could audit the Fed's low-cost loans to banks, and the Fed's buying and selling of securities to implement monetary policy.

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CAPITAL CUSHIONS

Big banks would have to reserve more money to protect against future losses. The standards would be as high as those for small banks. Certain hybrid securities would cease to count as Tier 1 capital, a key measure of a bank's strength. Banks would have to find other capital to replace the securities. [where?]


That accounting change would not apply to banks with under $15 billion in assets that already hold such securities. Larger banks would have to phase the securities out in five years.

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DERIVATIVES

Derivatives are financial instruments whose values change based on the price of some underlying investment. They were used for speculation, fueling the financial crisis. They were traded out of the sight of regulators.

The new law would force many of those trades onto more transparent exchanges.

Banks will continue trading derivatives related to interest rates, foreign exchanges, gold and silver. Those deals earn big profits for a handful of Wall Street titans.


But riskier derivatives could not be traded by banks. Those deals would run through affiliated companies with segregated finances. The goal is to protect taxpayers, since bank deposits are guaranteed by the government.

The change would apply to the risky mortgage investments that caused the crisis to spread.

The law prohibits government bailouts for banks that face big losses on derivatives.

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BANK RESTRICTIONS

Bank holding companies that have commercial banking operations would not be permitted to trade in speculative investments. However, bank holding companies will be allowed to invest up to 3 percent of their capital in private equity and hedge funds.

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EXECUTIVE PAY

Shareholders would have the right to cast nonbinding votes on executive pay packages. The Fed would set standards on excessive compensation that would be deemed an unsafe and unsound practice for the bank.

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RATINGS AGENCIES

Ratings agencies would have to register with the Securities and Exchange Commission and would face increased liability standards. The Securities and Exchange Commission would have to conduct a study to determine whether to change the long-standing practice where banks select and pay ratings agencies to rate their new offerings. The SEC would have to consider whether an independent board should select ratings agencies to assess the risks of new financial products.


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MORTGAGE LOANS

Lenders would be required to obtain proof from borrowers that they can pay for their mortgages. They would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents. That provision seeks to eliminate so-called stated-income loans where borrowers offered no proof of their ability to make mortgage payments.
Lenders would have to disclose the maximum amount that borrowers could pay on adjustable-rate mortgages. Mortgage lenders are barred from receiving incentives to push people into high-priced loans.

My reaction: Below are my thoughts on some of the provisions of the negotiated financial reform bill.

1) A 10-member council, led by the Treasury secretary, would monitor threats to the financial system.

Reaction: Not excited about it. Remember, the Treasury is the source of all evil (slight exaggeration).

2) If such a Too-Big-Too-Fail company teetered or posed a threat, the council could close it using taxes on the banking industry to cover the costs of doing so.

Reaction: This is another example of punishing (relatively more) solvent banks for the insolvent ones.

3) Ratings agencies would have to register with the Securities and Exchange Commission and would face increased liability standards.

Reaction: Keep in mind who is the biggest seller of Toxic debt: the government (FDIC is taking over banks with assets so toxic they couldn' t be repoed or sold). Think ratings are going to become more honest? Think again.

4) State consumer laws would apply to financial companies - unless federal regulators voted to block them on a case-by-case basis. Under the current system, state rules don't apply to national banks.

Reaction: This could be interesting, but my bet is that federal regulators will be blocking a LOT of state laws.

5) The Fed's relationships with banks would face more scrutiny from the Government Accountability Office, Congress' investigative arm.

Reaction: Probably the only piece of this legislation that could be a big deal.

6) Big banks would have to reserve more money to protect against future losses.

Reaction: Yes, wouldn' t it be wonderful if our banks could become solvent again. Unfortunately, I fail to see how this could happen.

7) The Fed would set standards on excessive compensation.

Reaction: Nothing changes.

8) The new law would force many of those trades onto more transparent exchanges.

Reaction: Before the bill, many but not all derivatives were trading on more transparent exchanges. After the bill, many but not all derivatives will be trading on more transparent exchanges

9) Mortgage Lenders would be required to obtain proof from borrowers that they can pay for their mortgages. They would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents.

Reaction: Not excited about it.

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