What Could Be The Consequences Of Financial Reform?

This week, the Senate will continue debate of financial reform legislation. It is expected that dozens of amendments could be voted on that could alter the bill. Consumer advocates are optimistic that they could beat out a multimillion dollar lobbying campaign by the financial institutions to create stronger consumer protections.

Consumer advocates say they are riding a tide of public opinion.

Ed Mierzwinski, Consumer Program Director at the US Public Interest Research Group, said, “I think we have a good chance to… have a fair fight on this.”

Mierzwinski points to a strange phenomenon with financial reform legislation.  “This bill’s getting stronger,” he said.

Usually, the longer a bill permeates in the halls of Congress, it gets weaker. That is because lobbyists, campaign contributions, and compromise all play a role.

But public anger at Wall Street continues after a telling public hearing that exposed Goldman Sachs’ denial of wrongdoing.

Derivatives regulations have been strengthened so that they are traded in public exchanges, instead of in a shadow banking system. And Senator Chris Dodd, Chair of the Banking Committee, has thus far resisted efforts to weaken the Consumer Federal Protection Board and the ‘too big to fail’ components.

Consumer advocates say they even have a chance to make what they call a good bill, better.

Here are some things to look out for:

1. Audit the Fed:
Senator Bernie Sanders’ (I-Vt.) proposal would require an audit of the Federal Reserve. The Federal Reserve has spent at least $2 trillion, outside the federal TARP program, to bail out the financial system. But because the Fed is not subject to audits and is not accountable to Congress, it is unclear who received the money and under what conditions.

Senator Sanders’ amendment has a coalition of unusual suspects.  The liberal Senator Barbara Boxer (D-Calif.), uber-conservatives Jim DeMint (R-SC) and David Vitter (R-La.), the unions, consumer advocates and limited government groups. The White House, though, does not.

2. End ’Too Big to Fail’:
The proposal by Senators Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.) defines ‘too big to fail’. It says no investment firm can be larger than 10% of the entire banking system. The current bill allows the Federal Reserve to determine ‘too big to fail’ based on systemic risk. The Fed can break up the banks only after other measures are taken first.

Heather McGhee with Demos, a public interest group, said, “The easiest way to end ‘Too Big to Fail’ is to end the too big part.”

3. Consumer Protection:
Another measure would bring the newly proposed Consumer Federal Protection Board out from under the helm of the Federal Reserve to be its own entity. The CFPB would provide protection for consumers who make a banking transactions with banks, credit cards, auto dealers and more. Under the current proposal, the CFPB is located under the Federal Reserve, but consumer advocates say they want it to be independent of regulators that are already overburdened.

A slew of amendments on the Republican side are expected to be offered that would weaken the CFPB by exempting auto dealers from complying and to give more power to the Federal Reserve over the CFPB.

4. The Volcker Rule
This amendment authored by Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) would prohibit banks from operating hedge funds and proprietary trading. “Prop trading” is when banks use their own money to trade for the bank’s own profit. It is seen as risky because banks put their interests, and not the customers, at the forefront.

David Min is with the Center for American Progress. He said, “I just don’t see how it’s a politically savvy move to be the part voting against changing practices in one of the most mismanaged industries in the United States.”

But lawmakers are expected to offer proposals that would weaken consumer protections and weaken regulation.

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