Washington — President Obama signed into law a bill that will radically reshape the U.S. financial system for the first time since the aftermath of the Great Depression, providing more safeguards against excesses on Wall Street and more protection to consumers of its products.
At a July 21 ceremony at the White House, Obama said the law will benefit investors, consumers and the financial industry itself.
“Our financial system only works — our markets are only free — when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. And that is what these reforms are designed to achieve: no more, no less,” the president said.
The Senate passed the final bill July 15 after the House of Representatives had approved it in June.
The explicit objective of the measure is to reduce the risk of a major financial crisis in the future.
The measure tries to address what its writers perceive as the root causes of the recent financial problems. It expands government oversight to a wider range of financial firms and instruments, bars banks from trading taxpayer-supported money for their own profit, makes trading of financial instruments known as derivatives more transparent and their traders more accountable, and gives regulators new powers to set stricter standards on the largest and most interconnected banks as well as to break up or liquidate those non-bank financial institutions whose failure is deemed a threat to the entire financial system.
“As a result, no firm will be insulated from the consequences of its action. … The bill makes absolutely clear that taxpayers will never be asked to bear the costs of a financial firm’s failure,” Treasury Deputy Secretary Neal Wolin said July 15.
In 2008 and 2009, the Treasury Department, central bankers and financial regulators struggled to come up with ad hoc solutions to prevent the bankruptcies of Bear Stearns, an investment bank, and AIG, the insurance giant, that regulators feared could have created havoc in the economy. The government ended up pumping public funds into AIG and some commercial banks to save them from failure.
The bill creates two new regulatory bodies: a council of regulators and the Consumer Financial Protection Agency. The council is designed to identify risks to the entire financial system and recommend steps to reduce those risks, such as heightened supervision and stricter capital reserve standards for certain financial institutions. The consumer agency, set within the structure of the U.S. central bank, will be devoted to the protection of consumers who use financial products such as home loans and credit cards. The creation of such an agency proved to be one of the most contentious issues during a yearlong debate about the reform.
Financial reforms were at the top of the agenda of the last three summits of the Group of 20 (G20), the world’s leading economies. At the June meeting in Canada, the G20 committed to advancing financial reform aimed at strengthening regulation of the world’s financial markets.
WHAT’S NEXT?
Although most lawmakers, experts and financial industry leaders agree that the bill will have a dramatic impact on Wall Street and the broader economy, they disagree on specific outcomes. Democrats and liberal-leaning experts hail the measure as an effective safeguard against a serious financial crisis similar to the one brought about by the collapse of the sub-prime mortgage market in 2007. Republicans and conservative experts have lambasted the bill for what they see as a government overreach unlikely to prevent future financial crises. Instead, it “will deter lending and freeze up credit,” said Senate Minority Leader Mitch McConnell, a Republican.
Observers from the liberal New America Foundation believe that the full impact of the new law may not be clear for years. It leaves many specific details to the discretion of regulators, such as what makes an institution too big to fail or what standards are reasonable. Thus, “in many ways the passage of the new law is just the beginning of a long fight ahead” between industry lobbyists and consumer advocates, said Justin King in his blog on the group’s Web site.
The measure doesn’t address major problems in the housing market that triggered the crisis, something that Republicans see as a major weakness. Deputy Secretary Wolin said the Obama administration plans to tackle this problem in 2011 as “it is obvious that the housing finance system cannot continue to operate as it has in the past.”
A summary of major provisions of the bill (PDF, 115KB) is available on the Senate Banking Committee website. Learn more about the law from a video available on the White House website. |
