Banking regulators shared the blame for the financial crisis that buckled Wall Street. Now they're the ones lawmakers are counting on to give final shape to the new overhaul of financial rules.
In section after section of the massive 1,560-page Senate bill, lawmakers leave much of the details for the regulators to figure out. These are the bank and market overseers — the Federal Reserve, the Office of the Comptroller of the Currency, the Securities and Exchange Commission — who took a beating for not overseeing Wall Street more strictly and for failing to see the danger before it struck in 2008.
When it comes to key decisions about how to rein in complex, previously unregulated securities, how to liquidate large, interconnected failing financial firms, even how to protect consumers, the bureaucracies in charge of setting the rules get plenty of discretion.
Lawmakers and Obama administration officials confronted the question time and again, about when to be specific and prescriptive and when to give the regulators latitude.
"There is room for imposing more duties and responsibilities on the regulators, and the bill contains a number steps to do that," Assistant Treasury Secretary Michael Barr said in an interview. "But we also don't want to lock anything in stone."
It's a delicate balance. For the financial industry, the more leeway regulators have, the more they can influence the final rules.
"It gives them wiggle room and pressure points," said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a nonprofit organization in Washington.
Of prime interest to the industry will be the final rules on derivatives, how much money and assets they must have on hand as capital, and to what degree they will have to give up their securities trading activities.
On each of those matters, the House legislation, which passed in December, and the Senate's, which passed Thursday, leave key decisions to regulators. For the next few weeks, all eyes will be on House and Senate negotiators who are blending both bills. In many respects the bills are similar and there should be no conflicts.
Overall, the bills aim to prevent a recurrence of the crisis that deepened the recession and cost millions of Americans their jobs and their savings. The legislation would create an oversight council of regulators to watch for risks in the financial system. It would create a consumer protection entity to police lending and enshrine a mechanism for liquidating large, interconnected firms.
On Friday, Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank both said they expect to have a bill ready for President Barack Obama to sign by July 4.
When it comes to capital standards, the House prescribes a specific leverage cap on financial institutions of 15-1 debt-to-net capital ratio. The Senate requires banks with more than $250 billion in assets to meet capital standards at least as strict as those that apply to smaller banks.
But policymakers are taking a second look at the Senate provision, saying that standard could have unintended consequences. The final capital standards could be left to the government bank overseers.
Likewise, the legislation requires that most derivatives deals be carried out through central clearing houses that would guarantee payment and require the parties to post collateral. Deals that are not cleared would require the parties to post more capital, but the bill does not specify the amount.
"Implementation through regulation is going to be a huge issue," said Arthur Wilmarth, a professor of banking law at the George Washington University Law School. "And then after the regulations are adopted, it's how the regulators enforce them."
For instance, while the Senate bill demands that commercial banks give up their ability to trade in risky securities for their own profit, it also requires that the oversight council conduct a study and recommend how to modify and implement the trading ban. That ban on so-called proprietary trading has been supported by former Fed Chairman Paul Volcker, an Obama economic adviser.
But Volcker also backed an amendment that would have eliminated the study requirement and been more specific about its implementation. That amendment failed to get a vote in the Senate.
Still, in other areas, the bill is fairly specific. In an effort to limit concentration in the financial industry, the Senate bill adopts an Obama administration recommendation that prevents large bank holding companies from becoming so big through a merger or acquisition that it holds more than 10 percent of all the financial industry assets.
Some experts worry that over time, regulators could become lax once again and the industry would exploit the overseers who are least likely to enforce the rules.
Douglas Elliott, a former managing director at J.P. Morgan, said he had hoped the legislation would have done more to consolidate bank regulators.
"There is a lot of time for one regulatory body to become kind of rogue," said Elliott, now a fellow at the Brookings Institution.
Indeed, whether the legislation will stop the next crisis from occurring is an open question.
John Dearie of the Financial Services Forum, an industry group that represents the largest banks, said the Senate bill goes a long way to address conflicts of credit rating agencies and ensures the regulation of derivatives.
"The bill also puts us in a better position to deal with a future crisis — if a large institution teeters on failure, we would have a procedure to wind it down in a controlled way," he said.
But as Goldman Sach's CEO Lloyd Blankfein said on PBS earlier this month: "You can pass a law against excess, and somewhere down the road some excess will appear at some point from some direction, and no one will know it at the time, and everyone will know it in hindsight."
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