The U.S. House tightened rules for derivatives and created powers to break apart large, healthy financial firms that threaten the economy in legislation passed today over objections from Wall Street and Republicans.
Lawmakers voted 223-202 on legislation to create a Consumer Financial Protection Agency, strengthen oversight of hedge funds and create a $150 billion industry-supported fund the government would use to take apart failed systemically risky firms. The focus shifts to the Senate, where lawmakers are drafting legislation without a schedule for action.
The legislation "will send a message that we're trying to respond to what got us into this economic meltdown and trying to set up mechanisms to prevent future economic meltdowns," Representative Mel Watt, a North Carolina Democrat, said today in an interview.
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. (C) The banking industry, Republican lawmakers and the nation's biggest business lobby are fighting to scale back the legislation.
The Wall Street Reform and Consumer Protection Act adopts priorities President Barack Obama outlined in June for strengthening financial rules. The bill lets regulators unwind failed systemically important firms, sets up a council to monitor for systemic risk and creates a $150 billion industry- backed fund for dissolving large failed firms. The bill ends a ban that shielded the Federal Reserve from audits of its monetary policy decisions.
Lawmakers considered more than two dozen amendments during more than five hours of debate today. The House rejected 223-208 an amendment by Representative Walt Minnick to create a council of regulators to oversee financial consumer protections in place of the proposed standalone agency. The banking industry opposes the agency.
Split Role "You don't achieve better regulation by splitting the responsibility between two regulators, in many cases thousands of miles apart, each with half of the responsibility," Minnick, an Idaho Democrat, said today.
House Financial Services Committee Chairman Barney Frank, the bill's sponsor, said a council would be "a monstrous" agency, "a 12-headed" body.
"One of the responsibilities of the consumer agency will be to issue rules to prevent the kind of abusive mortgages that had such a contributing role in our crisis," Frank said.
The financial-services industry has targeted the proposed Consumer Financial Protection Agency for defeat. The U.S. Chamber of Commerce this week endorsed the council idea.
The House rejected 241-188 a proposal to include a provision, opposed by the financial industry, that would let bankruptcy judges extend repayment periods, reduce interest rates and cut the principal on mortgages to avoid foreclosure.
'Tired of Bailouts' Lawmakers rejected a Republican substitute proposal that would create a new chapter of the bankruptcy code to dissolve large failed systemically important non-bank financial firms.
"The American people are tired of bailouts," Representative Randy Neugebauer, a Texas Republican, said today. "The American people have enough sense to make their own decisions."
The legislation rewrites rules overseeing the little- regulated $605 trillion over-the-counter derivatives market, blamed for contributing to last year's failures of AIG and Lehman Brothers Holdings Inc.
The measure requires the Commodity Futures Trading Commission to curb excessive speculation by restricting trading volumes on oil and currency futures. It requires broker-dealers including Goldman Sachs Group Inc. (GS) and "major swaps participants" like Fannie Mae to use regulated clearinghouses to process standard derivatives contracts that are normally accepted for clearing and deemed mandatory by regulators.
End Users Some derivatives transactions would be forced onto so- called swap execution facilities. Hedge funds, airlines and corporate end-users that don't pose a risk to the financial system won exclusions from the bill's clearing, trading and collateral requirements.
End users are mainly corporations that rely on derivatives to manage their so-called operational risks, such as protecting against swings in interest rates or fuel prices. Delta Air Lines Inc., agriculture company Cargill Inc. and farm equipment maker Deere & Co. successfully lobbied against some amendments that would have scaled back exclusions.
"These important risk management tools help keep manufacturers" operations going, invest in new technologies, build new plants and retain and expand workforces," Dorothy Coleman, vice president of tax and economic policy at the National Association of Manufacturers, said in a statement.
The New Democrat Coalition of 68 pro-business lawmakers persuaded House leaders to limit states from overriding federal consumer-protection rules for national banks. Financial companies support pre-emption, to avoid a patchwork of state laws, while consumer groups and state attorneys general want tougher rules on banks.
Senate Plans The House yesterday approved language by Representative Melissa Bean, an Illinois Democrat and member of the group. The provision gives federal regulators more discretion to override states than initially proposed.
In the Senate, Banking Committee Chairman Christopher Dodd last month released a draft that departed from Obama's proposal. His plan called for a single bank regulator, stripping the Federal Reserve and Federal Deposit Insurance Corp. of bank oversight powers and eliminating the Treasury Department's Office of the Comptroller of the Currency and the Office of Thrift Supervision.
Republicans rejected the plan as making permanent taxpayer- funded bailouts and objected to Dodd's proposed Consumer Financial Protection Agency.
In response, Dodd asked lawmakers to form four groups with two lawmakers from each party to devise a compromise measure. Senators are negotiating provisions of the legislation, including executive pay, derivatives, corporate governance, systemic risk and resolution authority. No bill has yet been introduced.