House Debates Financial Rules Overhaul, Reins in State Powers

Dec. 10 (Bloomberg) -- The U.S. House debated legislation today to toughen rules policing Wall Street after leaders quelled a Democratic revolt by members seeking to scale back states’ power to regulate national banks.

The New Democrat Coalition of 68 pro-business lawmakers won concessions after demanding consideration of a proposal to bar states from overriding federal consumer-protection rules for banks. Financial companies support pre-emption, to avoid a patchwork of state laws, while consumer groups and state attorneys general want states to impose tougher rules on banks as part of the overhaul of Wall Street regulations.

The legislation “makes it very, very unlikely that we’ll see a repeat of the economic problems we had before,” House Financial Services Committee Chairman Barney Frank, the bill’s sponsor, told reporters.

The measure is central to lawmakers’ effort to end government rescues of firms deemed too big to fail, which led to last year’s bailouts of New York-based American International Group Inc. and Citigroup Inc. The banking industry, Republican lawmakers and the nation’s biggest business lobby are fighting to scale back the legislation.

“This is about a big change,” House Speaker Nancy Pelosi said today. “We will prevail with this legislation.”

The Wall Street Reform and Consumer Protection Act adopts priorities President Barack Obama set out in June for strengthening financial rules. The bill would let regulators unwind failed systemically important firms, set up a council to monitor companies for systemic risk and give regulators power to break up large firms. The measure would rein in the derivatives industry and create a Consumer Financial Protection Agency.

35 Amendments

Lawmakers will consider 35 amendments tonight with leaders aiming for a final vote tomorrow. A House committee had reviewed 238 proposals to amend the bill.

House leaders and Frank yesterday agreed to include pre- emption language proposed by Representative Melissa Bean, an Illinois Democrat and member of the New Democrat Coalition, ending a stalemate that delayed debate until last night.

The agreement would add a provision into the broader bill that lets federal regulators override state consumer laws that interfere with a national bank’s ability to operate. It preserves the power of the Treasury Department’s Office of the Comptroller of the Currency, regulator of national banks, to interpret this standard and makes it easier for national banks to challenge pre-emption decisions in court.

Reining In Derivatives

A proposal to rein in the $600 trillion over-the-counter derivatives market will be a central topic of debate. A group of 171 companies that use swaps to hedge commodity prices and currencies is lobbying to revise language requiring them to post margins on their trades.

Such a provision “will tie up millions of dollars of capital for margins that companies otherwise could use to grow their businesses and create jobs,” said Ryan McKee, senior director for capital markets at the U.S. Chamber of Commerce.

Delta Air Lines Inc., agriculture company Cargill Inc. and farm equipment maker Deere & Co. are among companies lobbying for changes to the legislation.

“We’re not trying to eliminate the benefits of hedging,” said Representative Chris Van Hollen, a Maryland Democrat. “We want to make sure legitimate hedging doesn’t become rampant speculation.”

Frank said a proposal by Representative Walt Minnick, an Idaho Democrat, to create a council of regulators to oversee financial consumer protections in place of a standalone consumer agency would “damage” the bill’s intent.

Lawmakers are clashing over an industry-supported $150 billion fund the government would use when unwinding failed systemically important firms.

Republicans said the provision creates a perpetual bailout while Democrats defended it as a way to prevent taxpayers from propping up ailing financial firms in the future.

“There is no bailout fund,” Frank said yesterday. “If a company fails, it will be put to death.”

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Alec D.B. McCabe at amccabe@bloomberg.net