The U.S. Senate passed the biggest overhaul of financial-industry regulation since the Great Depression, sending a bill inspired by the 2008 credit crisis to the White House for President Barack Obama’s signature.
Senators voted 60-39 today in favor of the top-to-bottom rewrite of rules governing Wall Street firms, ending a year of partisan wrangling over protections for consumers and investors. The bill aims to prevent a repeat of an economic collapse that led to the failures of Lehman Brothers Holdings Inc. and Washington Mutual Inc. and a $700 billion bailout for companies including American International Group Inc. and Citigroup Inc.
“Never again, ever again should we have to go through what we did in the fall of 2008 to ask the American taxpayer to write a check for $700 billion to bail out a handful of financial institutions that frankly in many cases helped create the mess we were in,” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat and a lead architect of the bill, said at a news conference after the vote.
The measure’s passage came less than two hours before the U.S. Securities and Exchange Commission announced that Goldman Sachs Group Inc., which got $10 billion in bailout funds, will pay a record $550 million to settle claims it misled investors in collateralized debt obligations linked to subprime mortgages.
The bill will create a mechanism for liquidating failing financial firms whose collapse could roil markets, a council of regulators to police firms for threats to the economic system and a consumer bureau at the Federal Reserve to monitor banks for credit-card and mortgage lending abuses. It also expands oversight of executive compensation and derivatives, contracts whose value is derived from stocks, bonds, loans, currencies and commodities.
Today’s vote delivers a victory to Obama, who proposed the regulatory overhaul last year in response to the 2008 financial crisis sparked by the collapse of the U.S. mortgage market. The House of Representatives approved the bill on June 30.
Obama will likely sign the legislation toward the end of next week, White House spokesman Robert Gibbs said today. “We cannot continue to operate using the same rules that got us into the recession,” Gibbs told reporters. “This will be a vote Democrats will talk about through November.”
Most Senate Republicans voted against the measure, saying it doesn’t go far enough to prevent future taxpayer-funded bailouts of Wall Street firms and creates an unnecessary new bureaucracy in the consumer bureau.
Senator Richard Shelby of Alabama, the banking committee’s top Republican, called the bill a “2,300-page legislative monster.”
“It creates vast new bureaucracies with little accountability and seriously, I believe, undermines the competitiveness of the American economy,” Shelby said.
Measured against Wall Street excesses that nearly toppled the global financial system two years ago, some analysts saw the bill as tinkering at the edges of banking practices rather than forcing fundamental changes to the industry.
“There is little in this legislation that will fundamentally change the way that Wall Street does business,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “There is probably no economist who believes that this bill will end the risks of too-big-to- fail financial institutions. The six largest banks will still enjoy the enormous implicit subsidy that results from the expectation that the federal government will bail them out in the event of a crisis.”
To others, such as Douglas J. Elliott of the Brookings Institution, the bill named for Dodd and House Financial Services Committee Chairman Barney Frank empowers regulators to curb risk-taking and protect consumers in a way that will mitigate, if not prevent, the next financial crisis.
“I am confident that the vicious recession we just lived through would have been much milder if the Dodd-Frank bill had been in place a few years ago,” said Elliott, a former investment banker with JPMorgan Chase & Co. “The bill will not eliminate financial crises, but it will make them less frequent and considerably milder.”
Regulators will be responsible for implementing the legislation by writing hundreds of rules for financial firms.
“There’s always that possibility” that Wall Street lobbyists will succeed in weakening its provisions during the rule-making process, Dodd said today.
Edward Yingling, president of the American Bankers Association, a Washington-based trade group, said he is “very disappointed” with the bill.
“While its core provisions provide needed reform, it is overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis,” Yingling said in a statement. “Implementation of this legislation will be challenging for regulators, and we stand ready to work with them.”