WASHINGTON - The House of Representatives passed legislation Friday designed to bring the most sweeping rewrite of financial regulation since the New Deal era following the Great Depression.
The Wall Street Reform and Consumer Protection Act of 2009 would, among other things, create a mechanism for government to dissolve huge globally interconnected banks; provide first-ever regulation of exotic financial instruments called derivatives; rein in excessive speculative investment on Wall Street; require banks to set aside more capital in reserve; eliminate the much maligned Office of Thrift Supervision; give shareholders a greater say on executive pay; and tighten supervision over credit-rating agencies who sold out investors.
"We are sending a clear message to Wall Street: The party is over," House Speaker Nancy Pelosi, D-Calif., said during a news conference following the historic vote.
In a statement praising House passage, President Barack Obama said the act "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."
The final vote of 223 to 202 didn't lack for drama. House members first narrowly beat back an amendment by Rep. Walt Minnick, a conservative Idaho Democrat, to gut a centerpiece of the legislation.
Minnick sought to water down the president's proposed Consumer Financial Protection Agency, which would be a new standalone agency to regulate consumer credit products such as credit cards, mortgages and payday loans. This panel addresses most of the shortcomings in the housing market that led to a collapse in sales and prices.
Because several different bank regulators failed to carry out their consumer protection powers, these responsibilities would be given solely to the agency, which would try to prevent predatory lending, unscrupulous trick mortgages and surprise credit card fees.
Consumer groups rejoiced at the defeat of Minnick's attempt to kill the consumer panel.
"This agency would crack down on lenders and banks that abuse their customers, and it would provide information consumers need to make informed financial decisions," Jim Guest, president of the Consumers Union, publisher of Consumer Reports magazine, said in a statement.
Added Travis Plunkett, who heads lobbying efforts for the Consumer Federation of America, "This is a big win for consumers."
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The U.S. Chamber of Commerce feels otherwise. It ran television ads and heavily lobbied against the consumer panel, arguing alongside financial institutions that tougher regulation of mortgages and other credit products could result in higher costs for consumers.
"We now look forward to working with the Senate to advance more effective reforms that will protect investors and strengthen our capital markets without adding new layers of bureaucracy on top of the current system," David Hirschmann, the chamber's point man on finance, said in a statement.
The Senate Banking Committee is just beginning to consider its version of a revamp for financial regulation. Senate rules allow a single lawmaker to gum up the process, and the financial sector is placing its bets there to kill an agency that be given the consumer-protection powers now spread across numerous regulators who, by their own omission, failed on the job.
Republicans were successful in killing an amendment sought by housing advocates that would have given bankruptcy judges the ability to rewrite terms of mortgages so borrowers could remain in their homes. Judges can do this for second or vacation homes, luxury yachts and other areas where consumer debt is involved, but current laws prohibit reworking the terms of first mortgages.
Numerous Democrats joined GOP lawmakers in defeating this amendment - sometimes referred to as a cram-down provision, since judges could impose terms on banks - on the grounds that it could weaken bank finances and represented too steep a change from current practice. Democrats did pass an amendment forcing lenders to provide more public reporting on the pace of modifying distressed mortgages.
By a margin of 251 to 175, House lawmakers defeated a GOP amendment that would have substituted the main bill and offered a weaker version that represented more or less a status quo to the current regulatory structure. To make this substitute more attractive, Republicans included a number of provisions to bring the Troubled Asset Relief Program to an end.
The $700 billion TARP was created by the Bush administration in response to the near collapse of the global financial system in September 2008. The TARP was slated to end this year, but Treasury Secretary Timothy Geithner announced this week that he would keep it alive until October 2010 as a precaution, adding that he expected the TARP to end up costing taxpayers $200 billion less than anticipated.
"TARP has morphed into a $700 billion revolving bailout fund," said Rep. Jed Hensarling, R-Texas, in reference to Obama administration plans to use some of the remaining TARP money to help stimulate employment.
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee and the bill's shepherd, took to the floor to say that Republicans were suggesting by closing down the TARP that the deepest economic crisis since the Great Depression is over.
"Will someone tell the minority leader that it ain't over until it's over on Main Street and throughout America," Frank said, accusing Republicans of doing the bidding of unpopular Wall Street banks. "Most of us know the emergency is not over."