TORONTO — President Barack Obama Friday hailed a congressional agreement on the broadest revamp of financial regulation since the Great Depression, hoping it would give him more leverage at a weekend summit in Canada to convince the rest of the world to do the same.
"We need to act in concert," Obama said at the White House before boarding Air Force One for the flight to Toronto and his third economic summit that is expected to plot a global path out of the worst recession since the 1930s.
"This crisis proved, and events continue to affirm that our national economies are inextricably linked. And just as economic turmoil in one place can quickly spread to another, safeguards in each of our nations can help protect all nations," said the president.
The agreement between House and Senate negotiators on a new framework of financial regulation — reached at dawn Friday after a marathon 20-hour session — promised to give Obama his second major legislative accomplishment this year after health care.
It also could give him a stronger hand heading into meetings with the leaders of the world's top 20 economies. It would be a welcome counter to the much weaker position he has on the question of whether top nations should keep spending to stimulate the economy, which he is urging them to do. European leaders are rejecting his pleas and moving to rein in spending, and debt.
Obama did not address the spending question Friday, deciding instead to focus on his looming success at winning sweeping new financial regulations.
"We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression," he said. "Early this morning, the House and Senate reached an agreement on a set of Wall Street reforms that represents 90 percent of what I proposed when I took up this fight."
And the final product did have the administration's fingerprints. Treasury officials huddled into the wee hours with moderate members of the House of Representatives and liberal senators, trying to bridge differences on tough to get with banks. On several occasions during the late night debate, Republicans mocked their Democrat counterparts for doing the administration’s bidding.
The president said he wants a “strong and robust” finance industry and private sector, but the financial collapse of 2008 showed the need for greater regulation.
“The reforms making their way through Congress will hold Wall Street accountable so we can help prevent another financial crisis like the one that we’re still recovering from,” Obama said.
Asked whether the agreement would make it through the Senate, where it will take 60 votes, the president quipped: “You bet.”
Indeed, that’s why Treasury officials worked so hard to bridge differences not only between Democrats, but with moderate Republicans such as new Massachusetts Sen. Scott Brown.
The most significant accomplishment in the legislation was that it reinstated a partial ban on risky betting by commercial banks. Negotiators reached a compromise that would limit commercial banks from engaging in Wall Street trading if they're also conducting trading activities on behalf of clients.
Separation between deposit-taking commercial banks and so-called proprietary trading had been in effect since the Great Depression under the Glass-Steagall Act of 1933. However, deregulation in recent decades weakened that traditional separation and the act was repealed in 1999.
The repeal helped spark outsized risk taking on Wall Street that led to the financial crisis of 2008 and subsequent deep recession. Restoring parts of the ban became a mission for Democrats, but it proved to be among the most controversial elements of new rules for Wall Street.
Efforts to restore at least partial separation between commercial banks and Wall Street speculation has become known as the Volcker Rule. Former Federal Reserve Chairman Paul Volcker, an adviser to the Obama administration, championed the concept over the reservations of Treasury Secretary Timothy Geithner.
Under the compromise Dodd first announced Thursday, deposit-taking commercial banks could still invest in hedge funds and private equity funds, but their participation in these high-risk funds would be limited. Banks could own no more than 3 percent of such funds, and the investment couldn't exceed 3 percent of the bank's capital.
The move to allow some bank investment in hedge funds was intended to win support from Sen. Brown, the Massachusetts Republican., according to an industry official who requested anonymity because of proximity to the negotiations. Brown, one of four Republicans who supported the broad Senate bill, sought flexibility for Boston-based bank State Street, which has asset-management funds that could be affected by the restrictions.
Dodd said he sought to balance the need to limit risky betting by banks and the need of banks to hedge some of the risks they face in their lending business.
"We tried to strike a balance," said Dodd.
At the conclusion of the marathon session, he added, “After great debate we have produced a strong Wall Street reform bill that will change the way our financial services sector is regulated."
Investment banks such as Goldman Sachs and Merrill Lynch flourished in an era of deregulation, until 2008, when Bear Stearns was sold in a brokered fire-sale deal by regulators in March, followed by the collapse of Lehman Brothers six months later.
To avoid a similar fate, surviving investment banks moved quickly to become bank holding companies and qualify for taxpayer rescue funds. Merrill Lynch was acquired by Bank of America, at the time the strongest commercial bank.
Agreement on the Volcker Rule cleared the path for overnight negotiations on the thorniest portion of the legislation, a requirement that commercial banks spin off their trading operations for derivatives, a market of lightly regulated and highly complex financial instruments valued above $200 trillion.
The tougher derivatives language was in the Senate version of the legislation, but not in the House's, and the issue divided Democrats into camps. Moderate House Democrats threatened to withhold support from a final bill if the provision stayed, while liberal Senate Democrats threatened the same if it was dumped.
"This bill gets weaker by the day," complained Sen. Byron Dorgan, D-N.D., the chairman of the Senate Democratic Policy Committee.
The compromise will require banks to spin off their riskier investments, but maintain trading in more plain vanilla derivatives that involve bets on the movement of interest rates or the rise and fall of the U.S. dollar against foreign currencies.
Before addressing those two most difficult issues, negotiators agreed to numerous compromises. They allowed banks to escape prepaying billions of dollars into a fund to dissolve other banks whose failure could bring down the entire financial system.
In a blow to consumer advocates, lawmakers agreed that auto dealers who offer financing to customers should be exempt from direct regulation by a new Bureau of Consumer Financial Protection. The Pentagon took the unusual step of writing letters to negotiators calling for tougher regulation of auto lending, citing predatory lending practices aimed at members of the armed services.
Although he opposed the exemption for auto dealers, Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, conceded Thursday afternoon that he lacked the votes to block it.
Also to the ire of consumer advocates, lawmakers accepted a Senate compromise that would order the Securities and Exchange Commission to study for six months a rule to require everyone who provides investment advice to act in the best interests of their clients. Currently, financial advisers have this fiduciary duty, but broker-dealers and insurance agents who sell financial products don't.
Consumer advocates retained one ray of hope, however. The compromise would allow the SEC to begin a rulemaking process to impose such a standard if it sees fit.
"We expect the agency to stand up for Main Street investors," said Denise Voigt Crawford, the Texas Securities Commissioner and the president of the North American Securities Administrators Association. Thomma reported from Toronto, Hall and Lightman from Washington