Factbox: Major financial regulation reform proposals

(BestGrowthStock) – The Senate is debating landmark Wall Street reform legislation, proposed by Democrats and backed by President Barack Obama, to tighten the regulatory screws on banks and markets after the financial crisis.

The bill was seen as likely to win final approval, possibly next week. If approved, it would have to be merged with a bill backed by the U.S. House of Representatives in December. Then a final version could go to Obama, who would sign it into law.

Here are snapshots of the major elements of the bill:

PREVENTING MORE BAILOUTS

* Objective: Squash the idea that some financial firms are “too big to fail.” Prevent future bailouts like AIG’s.

But also prevent disasters that can come from refusing to bail out troubled firms, as the Bush administration did in 2008 with Lehman Brothers. Its collapse froze markets worldwide.

Seeking a middle ground between bailout and bankruptcy, the Senate bill sets up an “orderly liquidation” process for large firms in distress. Authorities could seize and dismantle them.

Senate Democrats have dropped a proposal to establish a $50-billion liquidation fund. Instead, government wind-downs of troubled firms would be paid for from asset sales and, in case of shortfalls, from fees assessed against other large firms.

* House-Senate dynamic: The House bill, like the Senate’s, has a new liquidation process that is somewhat simpler and includes a $200-billion prepaid liquidation fund.

* Winners and losers: If the new strategy works, the economy is better protected from financial sector crises. Big financial firms will take a hit from paying fees.

PROTECTING CONSUMERS

* Objective: Stop abusive home mortgages, credit cards.

Senate bill creates a financial consumer protection bureau inside Federal Reserve to regulate such products.

Disputes remain over whether state regulators could set and enforce rules stricter than those of the new federal watchdog.

Some Democrats want the watchdog to be more powerful than the plan in the bill. The Senate has defeated a Republican amendment that would have made the watchdog weaker and put it inside the Federal Deposit Insurance Corp, instead of the Fed.

House-Senate dynamic: The House bill calls for an independent financial consumer protection agency, while the Senate bill puts it in the Fed to appease Republicans.

The House bill exempts many businesses from the watchdog’s oversight. The Senate bill has fewer outright exemptions. A fight is under way on whether to exempt auto dealers.

Winners and losers: Consumers can expect stronger protections. Credit card firms and mortgage lenders face tougher regulations, regardless of where watchdog is set up.

VOLCKER RULE

* Objective: Ban risky trading, unrelated to customers’ needs, at banks with a cost-of-capital edge conferred by their being backed by taxpayers, either directly or otherwise.

Obama proposed this ban on “proprietary trading” in January along with his adviser, former Fed chairman Paul Volcker. It may become law but probably not as written.

“Volcker rule” provisions are in the Senate bill but it leaves the door open to regulators watering it down.

Democratic Senators Jeff Merkley and Carl Levin have offered an amendment to the broader bill to toughen the Volcker rule. It would bar banks from high-risk speculative trading, require large nonbank financial institutions to set aside more capital for speculative activity, and prohibit financial firms from betting against their customers.

* House-Senate dynamic: Volcker rule is not in House bill.

* Winners and losers: Too soon to say. Volcker says enacting the rule would avert the next financial crisis. Large firms could lose profits if the rule is enacted. But the Senate bill, as written, falls well short of making that a certainty.

OVER-THE-COUNTER DERIVATIVES

* Objective: Police the $615-trillion global over-the-counter derivatives market. A hothouse for risk during boom years, it greatly amplified the financial crisis.

The Senate bill proposes new rules along lines sought by Obama. He wants to push as much OTC derivatives traffic as possible through exchanges, electronic platforms and clearing houses, boosting transparency, risk comprehension and price competition. A hard-hitting proposal from Senate Agriculture Committee Chairman Blanche Lincoln has been added to the bill. It would require banks to separate their swap-trading units.

The Lincoln provision, opposed by Wall Street, may be dropped from the bill, according to aides and analysts.

* House-Senate dynamic: The two bills are similar but the House exempts a wide range of end users from central clearing.

* Winners and losers. Wall Street mega-firms — such as Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Wells Fargo — dominate the OTC derivatives market. The substantial profits they reap from it could be reduced.

SYSTEMIC RISK

* Objective: Create a new entity to spot and head off the next crisis. The Senate bill sets up a nine-member council of regulators, chaired by the Treasury secretary.

* House-Senate dynamic: The House bill proposes a council chaired by the Treasury but gives the Fed a bigger role.

* Winners and losers: Big banks and financial firms would be forced into a tighter regulatory straitjacket.

POLICING BANKS

* Objective: Rationalize the jigsaw-puzzle bank supervision system to stop problems from festering in the cracks.

The Senate bill keeps oversight of large bank holding companies with assets over $50 billion at the Fed.

A plan by Senate Banking Committee Chairman Christopher Dodd, a Democrat, to strip the Fed of its power over state banks with under $50 billion in assets has been dropped, under a bipartisan amendment approved on the Senate floor.

* House-Senate dynamic: Few differences remain now between the Senate bill and the House bill, which preserves the Fed’s and FDIC’s bank supervision roles. Both bills call for closing the Office of Thrift Supervision.

* Winners and losers: OTS will close.

EXECUTIVE PAY AND SHAREHOLDER RIGHTS

* Objective: Give shareholders more say on executive pay and more clout in electing directors.

* House-Senate dynamic: Both bills back these ideas. The House is less forceful on director nominations.

* Winners and losers: Corporate managers could lose their stranglehold on the director nomination process. Shareholders could gain more say on pay but it would largely be symbolic. Keywords: FINANCIAL REGULATION/

REGULATING HEDGE FUNDS

* Objective: Hedge funds must register with the government, opening their books to more scrutiny, but the Senate bill exempts venture capital funds and private equity funds.

* House-Senate dynamic: The House bill calls for registration of hedge funds worth $150 million or more. The Senate’s cut-off level is $100 million. The House bill exempts venture capital funds from full registration, while requiring offshore funds to register. The Senate bill does not do this.

* Winners and losers: Regulators would gain a window into a murky market. An estimated 55 percent of hedge funds are already registered. Those that are not would have to do so.

FIXING SECURITIZATION

* Objective: Make the securitization market more transparent and accountable.

The Senate bill forces securitizers to keep a baseline 5 percent of credit risk on securitized assets. A Republican attempt to gut that provision has been rejected.

* House-Senate dynamic: The bills are similar.

* Winners and losers: Investors in securitized products would be better protected. Securitizers — from lenders to Wall Street bundlers — face stricter oversight and higher costs.

CRACKING DOWN ON CREDIT RATING AGENCIES

* Objective: Boost the Securities and Exchange Commission’s power over credit rating agencies. The Senate bill also reduces instances in the law that mandate use of unneeded ratings and exposes raters to more legal risk.

Democratic Senator Al Franken has introduced a bipartisan amendment that would set up a Credit Rating Agency Board that would choose which rating agency would rate an issuer’s debt in an attempt to address what critics see as an inherent conflict of interest in the industry’s issuer-pays business model.

The Franken amendment has yet to come to a vote.

* House-Senate dynamic: The bills are similar.

Winners and losers: Major rating agencies — Moody’s Corp, Standard & Poor’s and Fitch Ratings — very likely will face stricter oversight.

CREDIT CARDS

Senator Richard Durbin, the Senate’s No. 2 Democrat, wants to restrain credit card fees affecting retailers.

“Interchange fees” are charged to supermarkets, convenience stores and other merchants by credit card lenders every time a customer uses a credit card. Durbin wants to rein them in and said he will offer an amendment to the reform bill.

FED SCRUTINY

Emergency lending by the Federal Reserve — the U.S. central bank — during the financial crisis would be the subject of a one-time congressional investigation, while the Fed would have to disclose the names of those it assisted, under an amendment to the reform bill that has been approved.

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(Reporting by Kevin Drawbaugh; Editing by James Dalgleish)

Factbox: Major financial regulation reform proposals