In a close vote, the House of Representatives Friday afternoon passed a financial reform bill intended to re-regulate Wall Street and increase protections for Main Street.
The bill, passed in a 223-202 vote, calls for the creation of a new federal agency dedicated to protecting consumers that would police consumer credit products like mortgages and credit cards. It also establishes new rules for the trading of derivatives and increases the transparency of the credit-rating process -- two previously under-regulated parts of the economy that played a large role in last year's economic collapse.
Not a single Republican voted for the bill. Twenty-seven Democrats broke with the rest of their party to vote against it.
The measure includes language, introduced in committee by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.), that would authorize an expansive audit of the Federal Reserve, a landmark achievement for critics of the central bank's secretive operations.
The bill also requires systemically important banks to pay into a fund that would be used to break them up and sell them off if they go bankrupt. Republicans bitterly and inaccurately referred to it as a "bailout fund," telegraphing a critique that will undoubtedly re-emerge during the 2010 midterm elections.
"Today is an important milestone in reversing the decades-long stranglehold Wall Street and big banks have had over our economy. But it is just the first step," said Service Employees International Union Secretary-Treasurer Anna Burger. "Despite the millions Wall Street and the Chamber of Commerce spent fighting the demands of the American people and the dozens of visits by big bank CEOs to strong-arm members of Congress, our leaders found the political will and courage to pass the most historic financial reform legislation in nearly 80 years."
The fight to fundamentally reform financial regulations began soon after President Barack Obama took office. Public zeal, though, was tempered on Capitol Hill by bankers and other Wall Street titans, who united to fight against the kind of reform advocated by consumers, union groups, and academics.
The bill disappointed some consumer groups, who pledged to work to make it stronger as it moves to the Senate.
"The bill does very little to address industry structure," the consumer advocacy group Public Citizen said in a statement. "The biggest banks are now bigger than they were before the crisis."
Michael Calhoun, president of the Center for Responsible Lending, hailed the bill's creation of the Consumer Financial Protection Agency, but worried it goes too far in allowing federal regulators to preempt their state compatriots.
"The bill would provide consumers with significant protections from the industry practices that dismantled our economy and those of countries around the world," he said. "We commend the House for this vote to protect families and small business from unfair, unsafe financial practices. However, we remain concerned that the bill allows the same federal banking regulators whose inaction led to the current crisis to continue to ignore state law. That must be fixed as the legislation moves forward."
Despite the advocacy by financial luminaries like former Federal Reserve Chairman Paul Volcker, the bill does nothing to break up big banks or address the mixing of commercial and investment banking by giant firms like JPMorgan Chase and Goldman Sachs.
Barbara Roper, director of investor protection at the Consumer Federation of America, praised the part of the bill dealing with credit rating agencies -- with a caveat, though.
"If you accept the whole business model as a given, the rest of it is strong," she said, referring to the fact that the agencies are paid by bond issuers to rate their products, creating an inherent conflict of interest.
Specifically, the bill subjects the credit rating agencies to increased liability, allowing for aggrieved investors to sue. Also, thanks to Rep. Brad Sherman (D-Calif.), a provision was added mandating that the agencies owe a duty of care to investors, rather than just to the bond issuers that pay them, she said.
The bill takes a stab at regulating derivatives, but key reforms were either ignored or voted down. An amendment by Bart Stupak (D-Mich.) calling for increased transparency in trading, which was backed by a coalition of pro-reform advocates, was voted down 330-98.
Financial Services Committee Chairman Barney Frank offered another amendment regarding derivatives that would have beefed up the powers of federal regulators, who have long lacked critical authority to initiate meaningful regulation. That, too, died.
A third amendment would have banned those derivatives that are, in essence, used by big financial firms to place bets upon bets upon bets, like the kind pioneered by AIG that helped crash the financial system last year. It also was voted down.
"Basically, the financial houses and the big banks are working [these amendments] real hard," Stupak said. "Wall Street's been working hard. We've been tripping over them all week. They've won this round."
Public Citizen offered this explanation:
It's no mystery why this legislation is not stronger. Wall Street spent $5 billion in political investments in the decade before the financial crisis to obtain deregulation and non-enforcement of existing rules.
Despite Wall Street having crashed the economy, nothing has changed on Capitol Hill. Wall Street continues to invest heavily in politics and wield enormous influence. More than 900 former federal employees, including 70 former members of Congress, are working as lobbyists for the financial services sector this year. Wall Street has spent more than $40 million on campaign contributions since November 2008.
"It was the single most important they needed to get right if they wanted to protect the system from future crises, and I don't think they got it right," Roper said.
The bill also addressed investor protection, increasing it in some areas but weakening it in others. Shareholders will now be able to hold non-binding votes on executive compensation -- a big win for investor groups. But the bill also includes a provision that changes current law by exempting about half of all publicly-traded companies from having to get audits of their internal controls. Fraud will be harder to catch, investor groups argue.
The House also voted to kill what many experts, consumer advocates and economists believe to be the best -- and perhaps the only -- way to stem the rising tide of foreclosures: a provision that would have allowed judges to cut the principal for struggling homeowners in bankruptcy.
Belying their expressions of outrage towards banks and sympathy for struggling homeowners, enough Democrats joined Republicans to kill the amendment offered by Democrats John Conyers of Michigan and Jim Marshall of Georgia, by a 241-188 vote.
Bankruptcy courts may reduce several forms of debt for distressed borrowers, but not the mortgage on a primary residence. Judges can, however, alter loan terms on vacation homes and cars, for example.
In March, the House passed a bill that was "substantively identical" to today's amendment, according to a summary of the amendment provided by the chamber's Rules Committee. The Senate, however, voted it down, leading Sen. Dick Durbin (D-Ill.), a longtime advocate for homeowners, to conclude that banks "frankly own the place."
"The financial industry has so much invested in political influence, in lobbying, in campaign contributions, into having a local network through the local banks and the credit unions," said Rep. Brad Miller (D-N.C.). "It's just very hard to go up against that based upon a strong public policy objective."
Backers of the measure thought it had a reasonable chance of passage, since, after all, it had already passed, and the foreclosure crisis has only gotten worse. About one in seven homeowners with a mortgage are either delinquent or in foreclosure. The passage of time, however, gave banks a chance to work the halls.
"We got a vote for it earlier this year, but it took a huge effort. There was none of that effort this time. I think that leadership has been working other issues in the bill, but not that one. And there's enormous opposition to it," said Miller.
One in four homeowners with a mortgage are "underwater," meaning they owe more on the home than it's worth. The administration's $75 billion foreclosure-prevention effort does virtually nothing to help those homeowners, consumer advocates and economists argue.
Furthermore, since the program's launch in March, less than 32,000 troubled homeowners have received permanent relief through the government's mortgage modification plan. It's supposed to help three to four million homeowners avoid foreclosure.
"You would think that would be a strong argument for doing something about it," Miller said. "And with the continued foreclosure rate and the effect that's having on home values and the effect they're having on each other, being such a downward force on our economy. But there's just a united front of opposition by the financial industry. If some members are playing it by thinking, well, I'll give them this vote but then I'll vote for the CFPA, I guess I can see that calculation."
Marshall pinned some of the blame on Treasury Secretary Tim Geithner, who had been cool to the idea last spring.
"The leadership here in the House is a big friend to this bill. The White House, well, the Treasury Secretary made some comments earlier this year that I thought were unfortunate. Other than Geithner's comments, I haven't really heard anything else from the White House. Obviously it's not on their priority list, among the many things they don't have much of an opinion about. Though Geithner did say something, and I wish I could recall, he said something earlier this year that was chilling. Not that he said it was a bad idea, but it certainly wasn't an endorsement," said Marshall.
Candidate Obama supported the idea of allowing judges to modify mortgages in bankruptcy en route to the White House. He even expressed public support in February when outlining his plan to stem foreclosures. But it wasn't in his detailed plan released the next month. Since then, the White House has largely been silent.
President Obama cheered the House action Friday. "This legislation brings us another important step closer to necessary, comprehensive financial reform that will create clear rules of the road, consistent and systematic enforcement of those rules, and a stronger, more stable financial system with better protections for consumers and investors," he said in a statement.
But the loopholes in the bill and the reforms that were voted down revealed something else to Roper -- an apparent deep-seated hostility to government regulation.
Time and time again, Roper noticed various reform proposals killed on the specious claim that they would kill jobs. Looking beyond today's vote, there are deep, structural roadblocks to fundamental reform, she said.
"Even as they're trying to cure the regulatory failures that led to the current crisis, they're setting us up for future crises," she said. "It's a philosophy and attitude to regulation that suggests that as soon as the spotlight is off they will be back to attacking regulation as too costly."
The vote, she said, reveals "that the attitude, the underlying problem, has not changed, and will come back to haunt us in the future."
"It's hard to be all that enthusiastic when you know that nothing has changed," she said.