WASHINGTON — The Senate Thursday night passed the most sweeping changes in government regulation of the nation's financial institutions since the Great Depression, including strong new consumer and investor protections and provisions that seek to shine a bright light on the dark corners of Wall Street.
In a 59-39 vote, four Republicans joined 53 Democrats and two independents in approving the Restoring American Financial Stability Act of 2010. Two Democrats, Washington's Maria Cantwell and Wisconsin's Russ Feingold, as well as 37 Republicans, voted no.
Republican Sens. Olympia Snowe and Susan Collins of Maine, as well as Scott Brown of Massachusetts and Charles Grassley of Iowa voted yes; Democrats Robert Byrd of West Virginia and Arlen Specter of Pennsylvania, who lost in Tuesday's primary, didn't vote.
The House of Representatives passed a similar version, the Wall Street Reform and Consumer Protection Act of 2009, six months ago. The two bills must now be reconciled in negotiations between the two chambers, passed anew by each and sent to President Barack Obama for his signature, which is expected by July 4.
"Our goal is not to punish the banks, but to protect the larger economy and the American people," Obama said Thursday.
Final passage came after an unusually smooth Senate debate, marred only slightly by Wednesday's failure to limit debate. That proved to be only a small bump in the bill's path, as Brown switched his vote Thursday to give Democrats the 60 votes they needed to limit debate and move to final passage.
Brown said he changed his mind after talking with Senate Majority Leader Harry Reid, D-Nev., and getting assurances on his concerns that insurers and other non-bank companies won't be subjected to tough restrictions on their ability to trade stocks on behalf of themselves and clients.
Like its House counterpart, the Senate bill would empower the Federal Reserve as the chief policeman on guard against risks to the broad financial system.
It also would create a new independent entity — called the Bureau of Consumer Financial Protection — to write rules for consumer credit products such as mortgages, student loans and credit cards, aimed at preventing predatory lending and creative loans of the sort that got so many homeowners in trouble.
"If you've ever applied for a credit card, a student loan, or a mortgage, you know the feeling of signing your name to pages of barely understandable fine print," Obama said Thursday. "It's a big step for most families, but one that's often filled with unnecessary confusion and apprehension. As a result, many Americans are simply duped into hidden fees and loans they just can't afford by companies that know exactly what they're doing."
Democrats argued that several different bank regulators failed to carry out their consumer protection powers, so the new agency should get sole responsibility. The U.S. Chamber of Commerce and Republicans tried repeatedly to water down the powers of the new entity, fearing it could overreach into areas beyond bank lending.
The Senate bill would house the new consumer protection agency inside the Fed; the House bill would make it a stand-alone independent entity.
The Senate bill also would create a mechanism for government to dissolve huge globally interconnected banks, those now dubbed "too big to fail" because their size threatens havoc in financial markets should they fail.
This mechanism, called resolution authority, addresses the current lack of clear rules for breaking up large global, interconnected financial institutions. Absent clear rules, the federal government protectively seized failed insurer American International Group in September 2008 at taxpayer expense. The absence of such rules also allowed for a disorderly collapse of investment bank Lehman Brothers that same month, sparking global financial panic.
The House bill would have banks pay up front into $150 billion fund to dissolve large financial institutions whose failure could threaten financial markets. The Senate version contains a compromise to attract GOP support that would have the Treasury Department and Federal Deposit Insurance Corp. paying up front, then being compensated through the sale of assets from the failed institutions. The Senate bill also mandates "living wills" for large financial firms, requiring them to give regulators a blueprint for how to break them up in case they fail.
The final hurdles to passage involved two amendments_ one on exempting auto dealers from consumer-protection provisions, as was the case in House legislation. The Senate plans to consider that plan separately Monday, and it has a lot of support.
"I don't recall in 2008 auto dealers were a significant reason for the economic collapse," said Sen. Ben Nelson, D-Neb.
Obama weighed in with a strongly worded statement saying that exempting the auto dealers would provide a chance for them to "inflate rates, insert hidden fees into the fine print of paperwork, and include expensive add-ons that catch purchasers by surprise." The dealers, who often are influential local voices and sources of campaign contributions, fought back hard.
"Dealer-assisted financing — which is always optional — regularly affords consumers more favorable terms than those available through other sources," maintained Ed Tonkin, the chairman of the National Automobile Dealers Association.
A separate fight over barring banks from speculative trading proved to be uglier. Republicans had blocked the amendment from being considered earlier this week, and Democrats fired back by maintaining that the GOP was doing Wall Street's bidding. The amendment was never given a vote before passage of the bill.
The Senate bill would go further than its House counterpart in giving shareholders more say on corporate boards. The House would empower shareholders on executive compensation, but to the ire of many corporations, the Senate bill would give the Securities and Exchange Commission authority to make it easier for shareholders — including unions — to select members of boards of directors.
There are many parallels between the Senate and House bills, including tightening supervision over credit-rating agencies, who gave investment-grade ratings to complex deals structured by Wall Street that turned out to be junk. An amendment to the Senate bill would create a mechanism for assigning ratings agencies to rate complex bonds backed by mortgages, ending Wall Street's ability to shop for the most favorable rating.
The bills both would require banks to set aside more capital in reserve to guard against future losses. Both also would eliminate the often maligned Office of Thrift Supervision, which would be folded into the Office of the Comptroller of the Currency, which regulates national banks.
The bill also creates the first-ever registration of hedge funds, until now lightly regulated entities that invest pools of money for the ultra-wealthy, and requires the largest of them to provide data to regulators.
Neither bill, however, seeks to merge the often overlapping SEC with the Commodity Futures Trading Commission. They remain separate entities, despite the close linkages between equities markets and commodities trading.
"We deal with everything in the world in this bill except some of the core issues that need to be dealt with," Sen. Bob Corker, R-Tenn., told SEC Chairman Mary Schapiro during a Thursday hearing.
Schapiro acknowledged that both market participants and products overlap, and added "were it up to me would have one agency."
The Senate bill also would weaken a change lauded by consumer advocates in the House bill. The House sought to hold broker-dealers and insurance agents who sell financial products to the same high standard of fiduciary responsibility as investment planners and financial advisers now are. The Senate would mandate the SEC to study this and report back. Problem is, the agency already has studied it and was ready to level the playing field.
Most last-minute concerns involved fear of the unknown.
"Everyone is frustrated. People have started reading the bill, and they're finding a lot of problems," said Sen. Richard Shelby of Alabama, top Republican on the Senate Banking Committee. "And they're getting a lot of pressure from a lot of people."
(Margaret Talev contributed to this article.)
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