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August 2010

Financial Reform Grabs
Congressional Spotlight


The U.S. Congress has spent the past several months debating reform of the nation’s financial systems. Separate bills passed the U.S. Senate and House of Representatives earlier this year that proponents argue will curb undue risk-taking by Wall Street firms and lessen the impact of any future financial crisis.

The bills differed enough that a Senate and House conference committee was created to work out differences in early summer. The House just passed the conference bill.

However, no one is certain whether there are 60 votes in the U.S. Senate to pass the revised bill. One of the principal holdouts is U.S. Senator Russ Feingold (D–WI), who argues the bill doesn’t go far enough and won’t prevent the kind of financial meltdown that occurred two years ago on Wall Street.

What could financial reform mean for you?

First, the bill provides consumers with the right to see their financial score if they are turned down by a lender, and it would limit “swipe fees” paid by merchants for debit card purchases. Depending on whether you listen to the banks or merchants, this latter provision may or may not save you money.

Second, the bill creates a new “Federal Financial Protection Bureau” within the Federal Reserve. The bureau would write rules on checking accounts, credit cards, and mortgages. It would also field consumer complaints about lending practices. The bureau would replace a confusing array of consumer protection authorities across a variety of federal agencies. The intent of the bill is to place strong power within one place for consumers who need help. The agency created by the bill would not replace state consumer protection agencies and would be given an initial annual budget of $500 million. By contrast, the Wisconsin Consumer Protection Bureau’s annual budget is $2.4 million.

Third, the bill creates a process where the federal government can break up large corporations in very serious financial trouble through “orderly liquidation.” The government would begin the process by taking over the corporation, installing new management, and then liquidating it through a process outlined by the U.S. Bankruptcy Code. The U.S. Treasury would be authorized to provide loans to help the liquidation process along. If this all sounds familiar, it’s similar to the process used by the federal government in the fall of 2008 with companies like American International Group (AIG), formerly the largest insurer in the world.

Fourth, the bill creates a nine-member “Financial Stability Oversight Council” to oversee large financial institutions. The council would have authority to order banks to increase their financial capital and to sell off more risky holdings. This may make it more difficult for risky borrowers to get loans.

Fifth, the bill regulates the very complicated derivatives and swaps market by changing the method by which they are traded to ensure more transparency.

Finally, Congress is debating who should pay the $19 billion 10-year cost of the legislation. Most Democrats argue the costs should be borne by banks with more than $50 billion in assets and hedge funds with more than $10 billion in assets. Republicans and some Democrats argue this is all too much.

The U.S. Senate needs 60 votes to move the bill; right now the vote count is too close to call. Stay tuned.   

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