On Saturday, December 12, 2009, President Barack Obama stated in his weekly radio and Internet address that he applauds the passage of the U.S. House of Representative financial regulations bill. With unanimous Republican opposition against the House bill, the final vote was 223-202, which included the opposition of 27 House Democrats. To become law, the House bill must survive in substantial part through the bicameral chambers of both the House and Senate and be signed by the U.S. President.
Increased Congressional Oversight of Federal Reserve in Regulating U.S. Banking System
Under the House bill, the U.S. Congress could break up financial entities believed to pose a systemic threat to the U.S. financial system. The House bill would also create the Consumer Financial Protection Agency (CFPA). CFPA would have audit powers over the Federal Reserve, including reviewing its monetary policies in light of potentially conflicting global interests.
In “Too Big to Fail,” Andrew Ross Sorkin dubs his 2009 book release “[t]he inside story of how Wall Street and Washington fought to save the financial system – and themselves.” It recounts the legendary 2008 ripples in the financial markets, including the public bankruptcy of Lehman Brothers; the fire sale of the prestigious Merrill Lynch to Bank of America; and the U.S. government’s nationalization of the world’s largest insurance firm.
Strengthening the Federal Deposit Insurance Company (FDIC)
Under the House bill, large financial institutions would be under greater federal government regulations and be subject to greater fees. The House bill seeks to increase bank accountability under Federal Deposit Insurance Company (FDIC) by allowing the FDIC to collect what amounts to insurance fees from the remaining “Too Big to Fail” institutions. These entities would have to establish a $150B FDIC-supervised insurance fund aimed against future risk of large bank failures. Small financial institutions are exempt under certain conditions under the proposed legislation.
Federal Bill to Increase Federal Reserve Transparency and Remove the Feds’ Power to Create Bank Laws
The Federal Reserve is a private business entity that was created in 1913 as the central bank of the United States. One of the historical debates since it was developed is the legal basis for a private business to create laws regulating a federal banking system.
The Federal Reserve Board recently exercised its bank regulatory powers. A couple days before the entry of the House bill, the Feds announced new consumer protection laws regulating bank overdraft fees on debit cards.
Federal Regulations Aim to Increase Consumer Protection
“The final overdraft rules represent an important step forward in consumer protection,” said Chairman Benjamin Bernanke in a 12/12/09 Federal Reserve Board official press release. The new Federal Reserve consumer protection law prohibits financial institutions from charging fees that are up to $39 per transaction under overdraft protection terms not previously opted into by bank customers on automated teller machines (ATM) and debit card transactions.
Under the House bill, the Federal Reserve’s power to write consumer protection laws would be eliminated. On December 10, 2009, the Feds issued a timely third quarter 2009 report titled “Flow of Funds Accounts of the United States: Flows and Outstandings.” It reports, inter alia, reduced U.S. household debt and a $2.7 trillion increase in its net worth.
Senate Considers U.S. Government Regulation of the Financial Market
The full attention is now on the Senate’s version of the financial markets bill. The Wall Street Journal (WSJ) reports that banking and business lobby groups have spent more than $300M in opposition to the House bill. The banking and business markets succeeded in defeating a provision of the House bill that would have allowed mortgage adjustments by bankruptcy judges.
Senator Republicans have publicly announced some of proposed additions and amendments to the House bill. Senator Christopher Dodd (D-CT), chairman of the Senate Banking Committee, draft legislation would create a single U.S. bank regulator and remove FDIC and Federal Reserve banking supervision. The senate draft would also place the Treasury Department in the Financial Institutions Regulatory Administration and eliminate the Office of the Comptroller of the Currency and Office of Thrift Supervision.
Republicans Opposition to Creation of Consumer Financial Protection Agency (CFPA)
According to the WSJ, Senate Republicans oppose, among other things, the creation of the CFPA. The multinational financial entities have also voiced opposition to the financial regulatory reform bill. In addition to increased regulations, the House bill would give shareholders an advisory vote on executive compensations in financial institutions such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc.
James Dimon, chief executive for J.P. Morgan, states that: “[a] new agency is just a whole new bureaucracy.” Timothy Ryan, president and chief executive of the Securities Industry and Financial Markets Association, also states in its association’s press release: “[c]ertain provisions in the legislation will undermine our shared goal of market stability and reducing systemic risk.”
If the new U.S. financial market legislation is passed by the U.S. Senate, it could go into effect within the first half of 2010.
Further Resources:
" Bipartisan Financial Reform Bill in U.S. Senate: Federal Reserve Board Chairman Bernanke Lobbies Against Reformation," by Vanessa Cross, Suite101 (12/31/2009).
General Disclaimer: This article is for informational purposes only and should not be used as a substitute for tax or legal advice.
Vanessa Cross - Vanessa Cross is a freelance writer who writes about international trade, business law and small business development issues.
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