Shoals still in path of Wall Street regulations

[December 08, 2009]  WASHINGTON (AP) -- Sweeping regulations to tame Wall Street and protect consumers in dealings with lenders are on the verge of passing the House but their fate is hardly sealed.

Crucial pieces are still flashpoints, fiercely opposed by various sectors of the financial services industry and likely to be fought on the House floor and beyond.

Some proposed changes, if voted on, could significantly dilute the proposed legislation. Top House Democrats will decide Tuesday and Wednesday what amendments to the bill will be considered before House debate on the bill opens Thursday.

At issue are provisions that could affect how homebuyers obtain mortgages, how large firms transact complicated financial trades and how large financial institutions borrow money.

Democrats also were seeking to add foreclosure-fighting measures to the regulatory bill, reviving legislation that would let bankruptcy judges rewrite mortgages to lower homeowners' monthly payments. The proposal, opposed by bank lobbyists, passed the House earlier this year, but then failed in the Senate, falling 15 votes short of the 60 needed to overcome procedural hurdles.

Democrats have become increasingly frustrated with the pace of loan modifications by mortgage companies. Last week, the Obama administration vowed to crack down on mortgage companies that fail to help borrowers at risk of losing their homes.

House Financial Services Committee Chairman Barney Frank, D-Mass., agreed on Monday to include $3 billion in the legislation to provide low-interest loans to unemployed homeowners in danger of foreclosure. Frank added the money, which would come out of the $700 billion financial rescue fund, at the request of Democratic Reps. Maxine Waters of California and Melvin Watt of North Carolina.

Watt and Waters are members of the Congressional Black Caucus, which had threatened to withhold its support from the legislation if Congress and the administration did not take steps to help the black community out of the recession.

The broader regulatory legislation is aimed at preventing a repeat of last year's financial meltdown that plunged the nation into the worst recession since the Great Depression of the 1930s. And it constitutes the biggest rewriting of laws governing banks, investment houses and other financial institutions since the New Deal.

It establishes a regulatory oversight council, chaired by the Treasury secretary, to monitor the financial system and identify future threats.

Companies that are so large and interconnected that they pose a risk to the economy would face greater supervision by the Federal Reserve and would have to hold more capital to protect against losses. If they pose a grave danger, regulators could dismantle them, even if the companies are healthy.

Large nonbank financial firms that fail would be dissolved, with bond holders and creditors taking losses. Additional costs of failure would be covered by a pre-assessment on other large firms. The bill would establish rules on previously unregulated derivatives and other financial instruments. Financial companies' executive compensation practices also would come under the purview of regulators.

With the Senate putting off action on its version until next year, the House bill is the target for critics and lobbyists to chip away at some of these provisions. Here are some of the most contentious measures:

CONSUMER FINANCE PROTECTION

The bill establishes a federal Consumer Financial Protection Agency opposed by banks and other lenders while also allowing states to impose even tougher consumer protection laws against big banks. States could have stricter rules on how lenders issue mortgages or credit cards.

As a compromise, federal regulators could exempt, or pre-empt, national banks from state laws that "significantly interfere" with the bank's ability to do business. Rep. Melissa Bean, D-Ill., and others want greater pre-emption for banks, a position strongly opposed by consumer advocates.

A floor fight over the provision was possible.

Frank, in a revised version of the legislation submitted Monday, eliminated an exception that his Financial Services Committee had inserted for automobile dealerships that provide financing to car buyers. Frank's change is opposed by car dealers, many of whom wield significant political power in lawmakers' districts.

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SECURED CREDITOR LOSSES

The legislation allows shareholders, unsecured creditors and bondholders all to be wiped out if the government has to take down a failing financial company. But it also subjects secured creditors to losses of up to 20 percent of their money. The provision, pushed by Federal Deposit Insurance Corp. head Sheila Bair, is intended to make secured creditors better assess the solvency of large financial institutions. Critics say it will hurt the large institutions because creditors will be less inclined to lend to them.

"That's controversial," Frank said. "I'm sure that will be debated on the floor."

Rep. Brad Miller, D-N.C., one of the authors of the 20-percent provision, argued that secured creditors would sustain losses only in an "extreme event ... a spectacular insolvency."

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OVER-THE-COUNTER DERIVATIVES

Over-the-counter derivatives are complex, often highly leveraged and largely unregulated instruments traded directly between buyers and sellers. They were blamed for accelerating last year's financial crisis. In pursuit of more transparency, the legislation would require most derivatives trades to go through clearinghouses. Financial companies dealing in the instruments would have to put more of their capital at risk.

But a lobbying push by Boeing Co., Caterpillar Inc., General Electric Co., Coca-Cola and other big companies persuaded lawmakers to exempt nonfinancial companies that use derivatives as a hedge against price, currency and interest rate changes rather than as a speculative investment.

The Obama administration wants fewer exemptions. Frank and House Agriculture Committee Chairman Collin Peterson, D-Minn., are seeking to tighten language so that the exceptions don't become loopholes for speculative bets.

[Associated Press; By JIM KUHNHENN]

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