The hidden changes in financial reform

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The Senate passed its financial reform bill. Huzzah! What did the Senate wind up with after three weeks of such intense lobbying and debate? First, I’ll run through the big, headline-grabbing changes. Then the real fun begins: the changes that are coming which you probably haven’t been hearing as much about. Just remember that Congress still has to mesh together the Senate bill with what the House passed in December. This isn’t necessarily the final say.

First, the familiar. The bill:

  • Creates a Financial Stability Oversight Council, led by the Treasury Secretary, to identify systemic risks in the economy, with the authority to write rules about how much leverage big financial firms are allowed to have
  • Establishes a process for winding down systemically interconnected firms, similar to what the FDIC currently does with banks
  • Houses a new Bureau of Consumer Financial Protection at the Federal Reserve, with the authority to make and enforce rules about products like checking accounts, mortgages and payday loans
  • Requires most derivatives to be traded on exchanges and funneled through third-party clearinghouses. Makes banks spin off their derivatives units into separate businesses (we’ll see if this particular provision survives the next round of negotiation)
  • Restricts banks from trading in their own accounts just to make money, as opposed to serving their clients
  • Sets up a new authority to act as an intermediary between companies looking for credit ratings on complex products and the ratings companies that produce them

And now some of the less-noticed provisions. The bill:

  • Requires mortgage lenders to gather documentation about a borrower’s income, effectively banning stated-income and “liar” loans. Limits lenders’ ability to penalize borrowers for paying off their loans early. Bans broker fees based on the interest rate of a loan
  • Mandates hedge funds with assets of $100 million or more to register with the SEC
  • Requires companies selling complex securitizations to hold on to at least 5% of the credit risk, in an attempt to better align their interests with those of investors
  • Creates an Office of National Insurance at the Treasury Department to keeps tabs on systemic risks in the insurance industry and make recommendations to the Financial Stability Oversight about who it should be watching
  • Makes it easier for investors to sue ratings companies should their ratings not hold up over time
  • Requires independent directors to determine compensation at publicly traded companies and gives shareholders an annual vote on pay packages (although companies are free to ignore it)
  • Abolishes the Office of Thrift Supervision, folding its regulatory duties into other agencies