WASHINGTON — The broadest revamp of financial regulation in seven decades cleared a key congressional committee Wednesday and will move next week to debate on the floor of the House of Representatives.
On a 31-27 party-line vote, the House Financial Services Committee passed the Financial Stability Improvement Act.
The measure addresses much of what led to the recent financial crisis, including insufficient government powers to shut down in an orderly fashion huge financial firms that are deemed too big to fail because they're interconnected globally.
The committee bill would create so-called "resolution authority," allowing the federal government to dismantle such huge financial firms, which it was unable to do when Lehman Brothers collapsed in September 2008.
Days later, the Federal Reserve used creative tools of questionable legality to save insurer American International Group and pay off its biggest creditors, which were mainly Wall Street banks.
"They had two choices: They pay nobody and you get a Lehman Brothers freeze on the economy, or an AIG, where you pay off everybody and piss off America," said Rep. Barney Frank, D-Mass., the chairman of the committee that drafted the bill.
After the vote, Frank was confident of House passage. Debate tentatively is scheduled to begin next Wednesday. His bill would provide the first-ever regulation of the complex financial transactions called derivatives and a new agency to protect investors and the consumers of credit products.
The Senate Banking Committee begins marking up its version of the legislation this month.
The broad outlines of the House legislation, which the Obama administration supports, seem unlikely to change by amendments next week, but intrigue remains.
Frank will offer an amendment to tighten some provisions so that banks can't take controlling stakes in the clearinghouses that process complex derivative transactions. Other Democrats will seek to limit the number of exemptions for individual companies.
Republicans may try to reverse a controversial amendment added by one of their own, Rep. Ron Paul of Texas. He capped a 25-year crusade with passage of a provision to have a government audit of the independent Federal Reserve, including its conduct of monetary policy.
Republicans were so against this audit idea that in 2003 they abolished a subcommittee to deny Paul the chairmanship of a panel that had oversight of the Fed.
The financial sector argues that Frank's bill will result in restricted lending to consumers and businesses.
"I think there's a political and economic need to modernize the system. The debate is over what is the most effective way to achieve those reforms," said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, an influential trade association. "We think the bill goes too far and could actually weaken the system it is supposed to strengthen."
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