Barack Obama signs financial reform law
More than a year ago, President Barack Obama unveiled a broad outline for new financial regulations. It took that long for Congress to hash out the details and get the legislation passed. The final bill looks a great deal like the framework Obama outlined in June 2009. Here are its major provisions.
Consumer Financial Protection Bureau. Consumer advocates have been pushing for an agency to look out for the interests of everyday Americans. The bureau will be responsible for writing new rules on financial consumer products (mostly loans and credit cards) and enforcing existing bank and credit union regulations. It will monitor payday lenders and check-cashing businesses. The agency, which is part of the Federal Reserve, will be led by a director appointed by the President and confirmed by the Senate.
New mortgage rules. Lenders are now required to verify applicants' credit history, income, and employment status. There are also restrictions on how many loans banks can sell to investors. The new rule is supposed to make banks bear more risk to limit lending to people at a high risk of default.
Size matters. The bill creates the "Financial Stability Oversight Council," which is supposed to monitor the U.S. economy for underlying systemic risks. It will make recommendations to the Federal Reserve for how to keep the economy from crashing by keeping tabs on firms that are deeply interconnected within the financial system.
Liquidation authority. The Federal Deposit Insurance Corporation will have a mechanism to unwind "failing systemically significant financial companies." Taxpayers will bear no cost for liquidating large, interconnected financial companies, according to the bill summary.
An audit for the Fed. The Government Accountability Office (GAO) will perform a one-time review of Federal Reserve emergency lending. The details should be on the Federal Reserve website by December 1, 2010. The GAO will have the authority to conduct more audits in the future, but there is no requirement.
Credit card rules. The law directs the Federal Reserve to issue rules that ensure that the "fees charged to merchants by credit card companies for credit or debit card transactions are reasonable and proportional to the cost of processing those transactions."
The Volcker Rule. Named after the former chairman of the Federal Reserve, the new rule prohibits banks from engaging in proprietary trading, i.e. trading the bank's money to turn a profit. Advocates for this rule say these kinds of trades tend to put banks into a conflict of interest with their customers. The rules also would limit banks' relationships with hedge funds and private equity funds.
Derivatives. A derivative is simply an investment the value of which depends on an underlying asset. Here's an example of a good derivative: Southwest Airlines has to buy jet fuel over the coming year to run its planes. If oil prices skyrocket, Southwest loses money. So the airline enters into an agreement that will pay if oil prices increase, reducing its potential for losses. But not all derivatives are so benign, and many blame their misuse for contributing to the financial panic of 2008. The new law gives the U.S. Commodity Futures Trading Commission along with the Securities and Exchange Commission authority to regulate over-the-counter derivatives. Banks would also be prohibited from trading certain forms of derivatives, and most of the trading must occur on transparent exchanges.
Hedge funds. Generally speaking, hedge funds are investment vehicles for select groups of elite investors. The name comes from hedging, or being careful about risk, but hedge funds generally are managed to increase profits which also increases risk. They often buy derivatives or other unusual types of investments. Under the new regulations, large hedge funds would have to register with the Securities and Exchange Commission and report their activities.
Credit rating agencies. The law seeks to address the conflict of interest that arises when banks and financial institutions pay a credit rating agency to evaluate their securities. It calls for a study on the issue, and says that regulators will issue new rules in the future.
"Say on pay." Shareholders of publicly traded companies get to vote on executive pay, though the vote is nonbinding.
The legislation won final approval on July 15, 2010, when the U.S. Senate approved a conference report with the House of Representatives. President Obama formally signed the legislation on July 21. So we rate this Promise Kept.
Thomas, The Restoring American Financial Stability Act of 2010, July 15, 2010
PolitiFact.com, FACTSHEET: Financial reform explained, April 29, 2010
CBS News, Wall Street Reform: A Summary of What's In the Bill, by Jill Jackson, June 25, 2010
CBS News, Financial Reform Bill: What Made the Cut, by Jill Schlesinger, June 25, 2010
House Financial Services Committee, Dodd-Frank Wall Street Reform and Consumer Protection Act, accessed July 15, 2010
The Seattle Times, What the financial reform means to you, June 25, 2010
Bloomberg Businessweek, Financial Reform's Uncertain Impact on Main Street, by Ben Steverman, June 27, 2010
The New York Times, In Deal, New Authority Over Wall Street, by Edward Wyatt and David Herszenhorn, June 25, 2010
The New York Times, On Finance Bill, Lobbying Shifts to Regulations, June 26, 2010
The New York Times, From Card Fees to Mortgages, a New Day for Consumers, by Ron Lieber and Tara Siegel Bernard, June 25, 2010
The New York Times, House-Senate Talks Drop New Credit-Rating Rules, by David M. Herszenhorn, June 15, 2010
The Wall Street Journal, U.S. Lawmakers Reach Accord on New Finance Rules, by Damian Paletta, June 25, 2010
National Public Radio, House,Senate Lawmakers Reach Deal On Bank Bill, June 25, 2010
MSNBC, No end in sight to Fannie, Freddie bailout, by John Schoen, July 15, 2010
The Huffington Post, How The Financial Reform Bill Affects Your Everyday Life, June 26, 2010
Advanced Trading, Cloud Of Uncertainty Hovers Over Volcker Rule With Finance Reform Set To Pass, by Justin Grant, July 14, 2010
The Washington Post, Lawmakers guide Dodd-Frank bill for Wall Street reform into homestretch, by David Cho, Jia Lynn Yang and Brady Dennis, June 26, 2010
Politico, Obama: 'On the brink' of Wall St. bill, by Carrie Budoff Brown and Meredith Shiner, June 24, 2010
E-mail and phone interview, Don Chance, Louisiana State University, July 14, 2010
Financial regulation has House approval, awaits Senate
The last time we checked on President Barack Obama's promise to create new financial regulations, the House of Representatives was considering a bill to more closely regulate the industry. Since then, the House has passed a bill and the proposal has moved to the Senate.
The House approved a measure 223-202 in a largely party-line vote on Dec. 11, 2009. All the House Republicans voted against the bill, joined by 27 Democrats. Only Democrats supported the measure.
The House bill was crafted in response to the economic collapse of a few of the biggest financial firms in the fall of 2008. The bill includes several measures:
• It gives the federal government the authority to take over and dismantle large, distressed financial companies if the institutions pose risks to the larger economy.
• It creates a Consumer Financial Protection Agency to regulate consumer financial products such as bank accounts, credit cards and mortgages. Democrats say that will be a robust watchdog agency defending ordinary consumers.
• It gives shareholders the ability to vote on executive compensation, otherwise known as a "say on pay" provision. But the vote would be nonbinding.
• It regulates derivatives, between dealers and what the bill considers "major swap participants." But it does not require all derivatives to be publicly traded.
• It creates a council of existing and new regulators who are asked to consult with each other to safeguard against systemic risk.
• It includes a variety of new rules for mortgage lenders, credit rating agencies and some hedge funds.
We wanted to note the latest development since this promise is among PolitiFact's Top 25 promises. The House vote does not change our rating, however. Obama's campaign promise is still In the Works.
Thomas, HR 4173, accessed Jan. 20, 2009
House Committee on Financial Services, Financial Regulatory Reform, accessed Jan. 20, 2009
Clerk of the House, roll call vote on financial regulatory legislation, Dec. 11, 2009
Obama presents detailed plan on financial regulation
President Barack Obama unveiled a detailed plan to overhaul regulations for the financial industry — including a new Consumer Financial Protection Agency — on June 17, 2009.
His plan also gives the government the power to regulate derivatives and intervene in large, interconnected financial institutions (not just banks). The Federal Reserve would receive new powers to police systemic risk.
The administration released an 88-page position paper outlining the proposal, and Obama delivered formal remarks before members of Congress, regulators and Cabinet secretaries to kick off the plan.
"Millions of Americans who've worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight," Obama said. "Our entire economy has been undermined by that failure."
His proposal has a way to go before becoming law. U.S. Treasury Secretary Timothy Geithner appeared before Congress the day after the plan was announced and fielded many questions about whether the plan was the best way to go.
Sen. Christopher Dodd, D-Conn., and the head of the Senate Banking Committee, raised concerns about giving additional regulatory powers to the Federal Reserve. Geithner responded that the new powers were modest and made sense given the Fed's other responsibilities.
We've designated this promise one of our Top Promises , and we'll be watching and providing more detail as the debate unfolds. This promise is still clearly In the Works.
U.S. Treasury Department, Financial Regulatory Reform: A New Foundation , June 17, 2009
The White House, Remarks by the President on 21st Century Financial Reform , June 17, 2009
U.S. Treasury Department, U.S. Treasury Department Releases "Financial Regulatory Reform: A New Foundation," June 17, 2009
Transcript, Senate Banking Committee Hearing, June 18, 2009
New York Times, Geithner on the Hill to promote financial overhaul , June 18, 2009
Geithner unveils proposal for new financial regulations
Overhauling the regulation of the financial system is no small thing. So President Barack Obama's economic team is unveiling it in stages, starting with broad outlines instead of draft legislation.
U.S. Treasury Secretary Timothy Geithner unveiled an overall framework on March 26, 2009. The framework lists four core areas for reform: identifying systemic risk; protecting consumers and investors; eliminating gaps in our regulatory structure; and fostering international coordination.
Geithner discussed details on identifying systemic risk and promised the other sections would be fleshed out in the weeks ahead.
To address systemic risk, Geithner called for several changes to current law. He wants expanded regulatory power over financial firms other than banks, to oversee any "systematically important firm." Identifying those firms should be based on what they do, he said in testimony before Congress.
"We must end the practice of allowing banks and other financial companies to choose their regulator simply by changing their charters; regulators must choose who to regulate," he said.
The government should also raise standards on capital and risk management; require the registration of hedge funds with assets under management above "a moderate threshold," begin comprehensive oversight for the over-the-counter derivatives market, and enact new requirements for money market funds.
We should emphasize that the Obama administration seems to be laying out guiding principles before draft legislation is made public. In other words, Obama has a long way to go. But the process has begun, and there seems to be broad agreement in Congress that some sort of regulatory overhaul is necessary. For now, we rate this promise In the Works.