“[The proposed resolution authority is] a workable proposition for anything short of these biggest banks."
–Paul Volker, June, 15, 2010
On June 25, 2010, an agreement was reached by the House and Senate conference committee on financial reform reached. However, the bill would continue to expose taxpayers by making bailouts permanent and codifying the “too big to fail” status for select Wall Street firms. The bill would continue the practice of using taxpayer funds as the initial source to bailout troubled firms. The bill would also make permanent the subjective standard regarding the treatment of creditors (e.g., Chrysler and GM) by authorizing the FDIC to determine how and when creditors of a failed firm would be paid. The bill would also expand the reach of government in the marketplace by creating several new intrusive government offices and agencies, including a Consumer Financial Protection Bureau and a Consumer Office of Financial Research, charged with collecting data on transactions carried out by any financial company in our economy. Listed below are several provisions that were agreed to by the House and Senate Democrat conferees.
UPDATE ON KEY ISSUES
Financial Stability Oversight Council: The bill would create a new systemic risk regulator called the Financial Stability Oversight Council (Council). The Council would be charged with, among other things, identifying risk to the financial stability of the nation. The Council’s membership would consist of the following: the Treasury Secretary (who would serve as Chair), the heads of the Federal Reserve, Office of the Comptroller of the Currency, FDIC, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Housing Finance Agency, and the new Bureau of Consumer Financial Protection (Bureau), an independent Presidential appointee having insurance expertise, and a new Office of Financial Research.
Resolution Authority: Title II of the bill provides the FDIC the authority to wipe out shareholders and management of firms placed in receivership, but the bill also provides the FDIC with significant latitude to make creditors whole. Congressional approval would be required for FDIC debt guarantee programs, and the FDIC would have Treasury line of credit. Treasury would supply funds to cover the up-front costs of winding down the failed firm. The FDIC would be authorized recover any losses incurred from the wind-down by assessing fees on financial firms with more than $50 billion in assets.
“Too Big to Fail”: The bill does not resolve the “too big to fail” issue, but codifies it by creating a special regulatory structure and resolution process for large financial firms, outside of bankruptcy, that uses taxpayer funds as the initially source to make creditors whole.
Bailout Fund: The House and Senate Democrats agreed to drop the $150 billion bailout fund that was included in the House bill.
New Slush Fund: The bill would require a special assessment on financial institutions with more than $50 billion in assets and hedge funds with more than $10 billion in assets to raise $19 billion to offset the cost of the bill. The fee would be collected by the FDIC over five years and placed in separate fund in the Treasury.
Consumer Protection: The bill would create the Consumer Financial Protection Bureau (rather than the CFPA) within the Fed. The bureau would have rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services. The bureau would have the authority to examine and enforce regulations banks and credit unions with assets of more than $10 billion in assets.
Preemption: The Conferees adopted preemption language consistent with the Barnett Bank case. The bill would allow the preemption of state laws on a case-by-case basis if the laws “prevent or significantly interfere” with the business of banking (the bank’s ability to do business). Also, state attorneys general would be authorized to enforce rules issued by the consumer protection bureau.
Interchange fees: The bill authorizes the Federal Reserve to write rules that would permit interchange fees on debit transactions to be limited to “reasonable” and “proportional.” This provision also exempts institutions with assets under $10 billion and government administered payment programs.
Volker Rule: Banks would be required to divest themselves of their investments in private equity and hedge funds, but would be permitted to provide capital and make de minimis investments in these funds under strict limitations, including the requirement that the aggregate investments in these funds would be limited to 3 percent or less of a banks Tier 1 capital.
Derivatives: The Democrat conferees agreed to impose new capital, margin, record-keeping and reporting requirements. Banks would be allowed to use derivatives to hedge their own risk and to engage in loan-level hedging programs. Other types of swaps activity, including un-cleared credit default swaps, must be done by an affiliate. The bill would require most derivatives to be traded on exchanges and routed through clearinghouses, and the bill would narrow the definitions of swap dealer and major swap participants.
Fannie and Freddie: The Democrat Conferees rejected an offer making Fannie Mae and Freddie Mac financial companies for purposes of the bill’s liquidation process and would have relieved the taxpayers of the GSEs’ liabilities. The bill does not address the issue of reforming Fannie and Freddie.