WASHINGTON — Like a hard-fought draw in a World Cup soccer match, consumers won sweeping new protections under a revamp of financial regulation that lawmakers agreed to Friday but large banks dodged the biggest hits that had been coming their way.
The sweeping regulatory revamp affects everything from credit cards and mortgages to the structure of large global banks and who regulates the financial sector and how.
Lawmakers, narrowing the differences between legislation from the House of Representatives and the Senate, agreed to establish a Bureau of Consumer Financial Protection to address the shoddy lending and ineffective regulation that helped bring about the nation's financial crisis.
Congressional negotiators also rejected attempts to weaken the new bureau, retaining an independent source of funding and an independent director rather than a board of directors.
When the full House and Senate take up the entire bill next week, however, they'll vote on a package that won't hit big banks nearly as hard as Congress first contemplated.
Banks won't have to prepay billions of dollars into a fund to cover the cost of breaking up large failing financial institutions, as both the House and Senate first proposed. Banks also escaped a limitation on their size, and there's no explicit prohibition of government rescues if their failures pose major risks to the economy.
In addition, they'll have to wall off their trading in the lucrative, complex instruments called derivatives in separate related companies. The lack of transparency surrounding derivatives amplified the financial crisis.
In a compromise brokered by the Treasury Department, banks were able to keep their trading desks for common — and generally less-risky — types of derivatives, such as bets on swings in interest rates and on the U.S. dollar's value against other currencies. This move won over the New Democrat Coalition, 69 moderates in the House.
The compromise "combines tough new rules and oversight that reduce systemic risk on Wall Street with provisions that allow American manufacturers and lenders to reduce their own risk," Reps. Joseph Crowley, D-N.Y., and Melissa Bean, D-Ill., said in a statement to McClatchy.
The softening was a sigh of relief for Wall Street, but slapping high fives was unlikely because banks lost the right to conduct trading operations if they also trade on behalf of clients.
The legislation builds a wall between commercial banking and investment activities that was in place for almost seven decades before Congress took it down in 1999. Less than a decade later, Wall Street's runaway risk-taking brought the global economy to near-collapse in the fall of 2008. Friday's compromise requires deposit-taking banks to divest their proprietary trading operations over time.
"If implemented effectively, it will significantly reduce systemic risk to our financial system and protect American taxpayers and businesses from Wall Street's risky bets. This is an important step forward from the current system," Sens. Carl Levin, D-Mich., and Jeff Merkley, D-Ore., the authors of the tough provision, said in a joint statement Friday.
"This law will send a clear warning: No longer will we allow recklessness on Wall Street to cause joblessness on Main Street," said House Speaker Nancy Pelosi, D-Calif.
Former investment banker Douglas Elliott, who's now an analyst for the Brookings Institution, a center-left policy-research center in Washington, agreed that the bill accomplishes much.
"There are maybe 15 major things in this bill, and if we only talk about two or three, we're missing the big picture, and the things work together," he said.
Throughout the two-week negotiations, efforts were made to ensure that there'd be 60 votes in favor of it in the Senate, to prevent a filibuster next week. That meant ceding to some demands from moderate Republicans and liberal Democrats.
When President Barack Obama was asked Friday whether the votes were there for final passage next week, he quipped: "You bet."
Yet there were doubts Friday, too.
"It's really hard to make the case this bill does all that's needed to do," said Sen. Byron Dorgan, D-N.D., the chairman of the Senate Democratic Policy Committee. "It doesn't really deal with 'too big to fail.' It doesn't necessarily stop speculative wagering."
Dorgan didn't say Friday how he'd vote.
"Is it better than nothing? It does set up new regulatory approaches," he said. "But we had a chance to do much, much more."
The legislation gives the Federal Reserve and a new council of regulators the power to tell large and globally interconnected financial firms to get smaller through spinoffs because their size threatens the broader financial system.
It also creates a process for dissolving large institutions whose failure threatens other big firms. The lack of these powers led the government into unpopular bailout programs to prevent a domino-like collapse of the global financial system.
Those bailouts still anger voters, and that complicates the sales pitch for Democrats, especially because the legislation is complex.
"Go down to Paulding County, Georgia, or take the first exit off Interstate 95 in Florida, and ask people what they think about financial regulation," said Brad Coker, the managing director of Mason-Dixon Polling & Research, which polls nationwide. "How many people anywhere know what a derivative trade is? These are very nerdy kinds of issues."
Rep. Chris Van Hollen, D-Md., the head of the Democratic House campaign committee, was confident that voters will see the benefits.
"You will soon have within the Fed an agency whose sole job is to make sure consumers are not cheated or unfairly taken advantage of by credit card companies, lenders and banks on mortgages and other credit. That is the one thing that has a direct impact on consumers on a day-to-day basis," he said.
How well the legislation works to forestall financial crises will depend on whether other developed nations follow suit.
"We need to act in concert," Obama said Friday at the White House.
Not all the changes in the compromise legislation will happen immediately. Many will be phased in, while others require study and consultation with affected industries. Additionally, regulators were given wide latitude to fill in details.
"There will be a lot of employment opportunities for lawyers," said Bert Ely, a banking consultant who expects a big push to find ways around new regulation. "I think a lot of entrepreneurial activity will be 'how do we end-around this?'"
In a harsh statement Friday, U.S. Chamber of Commerce CEO Thomas Donohue vowed to "work vigorously through all available avenues — regulatory, legislative and legal" to change the "flawed" legislation.
(Steven Thomma contributed to this article from Toronto.)
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