Democrats reshape Wall Street

Congress finalized sweeping financial overhaul legislation on Thursday, handing President Obama a major legislative victory heading into the midterm elections.

Obama intends to sign the legislation next week, while Republicans promised to work for its repeal if they retake Congress.

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“Because of this reform, the American people will never again be asked to foot the bill for Wall Street’s mistakes,” Obama said Thursday outside the White House.

The Senate voted 60-39 in support of the 2,315-page bill after ending debate earlier in the day. The House already passed the measure, which will become law nearly two years after the worst financial crisis since the Great Depression.

Democrats hailed the effort as a crackdown on the worst excesses of Wall Street, which forced Congress late in 2008 to pass a $700 billion taxpayer-funded bailout. The crisis helped push the economy into a deep recession that claimed millions of U.S. jobs and led to double-digit unemployment rates.

House and Senate Republicans criticized the legislation as a government overreach.

“I think it ought to be repealed,” House Minority Leader John Boehner (R-Ohio) said.

Republican Sens. Richard Shelby (Ala.), John Thune (S.D.) and George LeMieux (Fla.) quickly echoed Boehner’s sentiments. “If you vote against it, you know it should be repealed,” Shelby said.

The final vote came on a day when the Securities and Exchange Commission (SEC) announced a $550 million settlement with Goldman Sachs, the country’s most storied bank, stemming from fraud allegations. The charges were related to investments tied to the housing market that touched off the crisis. Goldman acknowledged mistakes.

The legislation passed the Senate with the support of only three Republicans: Sens. Susan Collins (Maine), Olympia Snowe (Maine) and Scott Brown (Mass.). Sen. Russ Feingold (Wis.) was the lone Democrat opposed to the measure, which he said was not tough enough on the industry.

House Financial Services Committee Chairman Barney Frank (D-Mass.) and Senate Banking Committee Chairman Chris Dodd (D-Conn.) shepherded the measure, dubbed the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” through Congress during the last year.

The bill sets up a new consumer protection regulator to oversee products such as home loans and credit cards; boosts regulation of the $600 trillion derivatives market; creates a new council of regulators to assess risks across the financial system; and sets up a new system for failing financial firms.

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Consumer advocates and financial lobbyists are already preparing for years of debate before federal regulatory agencies are required to issue new rules. “Game one over,” said Richard Hunt, president of the Consumer Bankers Association. “Game two, regulators, beginning.”

After more than a year of lobbying, here is how some of the biggest interest groups made out:

Consumer advocates: Advocacy groups including the U.S. Public Interest Research Group (PIRG) and Consumer Federation of America won big with the creation of a new consumer protection agency. They pushed back against financial industry lobbyists who called on lawmakers to shelve the bureau during months of stalled private talks in the Senate. There were repeated efforts to limit the power and scope of the consumer protection office, but the new bureau largely resembles its original vision.

Auto dealers: The National Automobile Dealers Association (NADA) waged a massive grassroots and lobbying campaign to win an exemption from the new consumer protection regulator. They faced frequent public criticism from the White House, Defense Department and consumer advocates, but overcame the opposition at nearly every stage of the debate. Auto dealers argued they had nothing to do with the financial crisis. A wide range of Democrats and Republicans listened and agreed.

Big-box retailers and small merchants: Merchant and retailer groups seized on the regulatory debate to push a long-sought provision clamping down on the “interchange fees” they pay to banks and credit unions that issue debit and credit cards. Senate Majority Whip Dick Durbin (D-Ill.) backed the provision in the Senate that instructs the Federal Reserve to require “reasonable and proportional” fees on debit cards. The specifics are left up to new federal rules, but the merchant and retailer groups overcame opposition from bank and credit union lobbyists.

Community banks: Thousands of small banks lobbied hard for relief from the consumer protection office and for preserving regulation by the Federal Reserve. The Independent Community Bankers of America (ICBA) was a vocal lobbying force throughout the debate. Small banks didn’t win all of their battles, however. They argue they will still be hurt by the “interchange fee” regulations, even though the bill aims to exempt banks with $10 billion or less in assets.

Credit unions: Credit union groups fought and won many similar battles as small banks. The National Association of Federal Credit Unions (NAFCU) and Credit Union National Association (CUNA) activated massive grassroots efforts to limit the impact on credit unions of many of the bill’s provisions. Still, they lost in their battle against the “interchange fee” measure.

Big banks: Big banks were in the crosshairs ever since the financial crisis erupted and Congress was forced to pass the $700 billion bailout. The measure will lead to higher capital standards, new restrictions on a derivatives market dominated by big banks and new regulations of home loans and credit cards.
But lawmakers stopped short at numerous points of even more far-reaching provisions. A measure to draw a fixed cap on the size of banks failed in the Senate. Calls to reinstate the 1933 Glass-Steagall wall between investment and commercial banking never made much headway. A controversial provision to require banks to spin off their derivatives trading was scaled back late in the negotiations to require a push-out of only the riskiest derivatives. The “Volcker rule” provision to limit proprietary trading and sponsorship of hedge funds and private equity shops was also somewhat limited. There was a small allowance for banks to invest capital in hedge funds and private equity shops.

Goldman Sachs: Goldman received the brunt of the public outrage and criticism in 2010 after the SEC alleged the firm fraudulently misled investors about products tied to the sub-prime housing market. The allegations pushed Democratic senators, notably Carl Levin (Mich.) and Jeff Merkley (Ore.), to push for stronger restrictions on big banks. The firm was constantly criticized in headlines. The settlement announced on Thursday requires the firm to pay $250 million to harmed investors and $300 million to the Treasury Department. The firm acknowledged that it made mistakes. Still, there are some provisions in the financial bill that would allow Goldman to convert away from being a bank holding company and thereby possibly face less onerous regulations.

Derivatives clearinghouses and exchanges: In the effort to bring transparency to the multitrillion-dollar derivatives market, lawmakers included requirements to shift many trades in the complicated products to third-party middlemen. Those provisions will likely be a boon to exchanges, clearinghouses and swap execution facilities, the complicated plumbing of the financial world.