Thursday night’s passage of Wall Street reform by the U.S. Senate is an event to be celebrated, but several key issues remain in play as the House and Senate seek to iron out differences between their respective versions of the legislation. And while the final bill will provide regulators with important new tools to fight financial excess, many of the most critical issues facing our economy will simply not be addressed, leaving the next Congress with plenty of work to do.
Here’s a list of key issues to watch as Congress moves to the conference committee between the House and Senate:
1. The Volcker Rule
The best version of President Obama’s signature Wall Street reform was an amendment written by Sens. Jeff Merkley, D-Ore., and Carl Levin, D-Mich. It was never voted on in the Senate, and the House bill contains no version of any ban on proprietary trading by commercial banks. The Senate bill does include a weak version of the Volcker Rule that bank-friendly regulators can easily defang if they choose. Watch to see if negotiations lead to any procedural magic to implement Merkley-Levin.
2. The Consumer Financial Protection Agency
The House version of this agency is generally stronger than the Senate version, with more independence and broader authority. But the House version also exempts auto dealers from CFPA oversight, which the Senate version does not.
The Senate’s language on derivatives is generally much stronger than that in the House, with one major exception. The Senate bill contains fewer and narrower loopholes than the House version, in addition to a requirement that banks spin-off their derivatives dealing operations into an independently capitalized unit. But both versions of the bill have weaknesses related to actually enforcing the new derivatives rules, and the problems in the Senate version are deeper than those in the House (this is why Sen. Maria Cantwell, D-Wash., voted against the bill). Barney Frank has said he wishes the House had better derivatives language, so watch for this to be strengthened.
4. Capital and Leverage
The Senate bill contains a modestly strong provision from Sen. Susan Collins, R-Maine, to toughen capital requirements at big banks, forcing them to have more money on hand to cushion against losses. There is no corresponding language in the House bill, but the House legislation does contain a provision capping bank leverage—the amount of borrowed money banks can use to place bets in the capital markets casinos. How these good amendments fare will significantly impact how the financial system functions over the next decade.
5. Rating agencies
Sen. Al Franken pushed through an amendment that substantively changes the corrupt business model at rating agencies. Right now, rating agencies do not get paid by the investors who use their ratings, but by the very banks who are issuing those securities. Franken would end this system, having regulators to select which rating agencies rate which securities, rather than the banks who issue the securities. The House bill largely leaves the rating agency business model unchanged.
6. Swipe fees
When you buy something at a store with a credit or debit card, Visa and Mastercard charge that store a fee. The store, in turn, charges you more for its products, making everything everybody buys more expensive. Sen. Dick Durbin, D-Ill., pushed through language cracking down on debit card fees, but there is no language addressing swipe fees of any kind in the House.
How Did The Senate Do?
The fact that many of these issues are even in play marks a surprise victory for progressives and other reform advocates. Nobody expected Franken’s rating agency bill to make it through, nor were swipe fees considered to be in play. Even better, we know with certainty that the Federal Reserve’s multi-trillion-dollar bailout operations will finally be subjected to public scrutiny, no matter what happens. Progressives like economist Dean Baker and conservatives like Rep. Ron Paul, R-Tex., have been pushing for an audit of the Fed for years, with little progress. The fact that the Fed’s most secretive and controversial programs will finally be revealed to the public is a major event, one that should fuel calls for further reform.
There were also several disappointments in the Senate. The fact that Merkley-Levin never came up for a vote is a major embarrassment to the Democratic leadership, especially Majority Leader Harry Reid, D-Nev., Chris Dodd, D-Conn., and Obama himself. The fact that the derivatives language contains serious loopholes is also unacceptable, as are the depth of Dodd’s concessions on the Consumer Financial Protection Agency, and the concessions to the bank lobby impeding state regulators from cracking down on predatory lending.
Nevertheless, the bill really will establish some important new economic tools. The new resolution authority to shut down complex banking conglomerates will not end too-big-to-fail, but it will give regulators the ability to cope with some failing institutions that it currently cannot handle. Regulators already have the authority to shut down boring commercial banks, but they do not always invoke it when those boring banks are big enough, and we can expect a similar pattern for more complex institutions. Similarly, whatever concessions bank lobbyists ultimately get in committee, Congress will also create new infrastructure to bring this multi-trillion-dollar market out of the shadows, and an agency that will give Elizabeth Warren an avenue to go after predatory lending.
The Next Step
Of course, it has been clear for some time that this bill will not address many of the deepest problems plaguing the financial system. The only way to end the political and economic domination of our too-big-to-fail banking behemoths is to break them up into smaller firms that can fail safely. The bill does not do that. It also does not reform the corrupt structure of the Fed, in which banks are allowed to choose their own regulators. No serious action will be taken against hedge funds, private equity vultures, Fannie Mae or Freddie Mac. Nothing will be done to treat the foreclosure epidemic that is still hammering homeowners. The hard, clear division between boring commercial banking and risky investment banking that protected our economy from bailouts for over fifty years still needs to be restored.
In short, the Senate’s passage of Wall Street reform legislation is a critical step in the right direction. But there is still important work to be done in the coming weeks, and even more important work for the next legislative cycle.