I
n section after section of the massive 1,560-page Senate bill, lawmakers leave much of the details for the regulators to figure out. These are the bank and market overseers
- the Federal Reserve, the Office of the Comptroller of the Currency, the Securities and Exchange Commission
- who took a beating for not overseeing Wall Street more strictly and for failing to see the danger before it struck in 2008.
When it comes to key decisions about how to rein in complex, previously unregulated securities, how to liquidate large, interconnected failing financial firms, even how to protect consumers, the bureaucracies in charge of setting the rules get plenty of discretion.
Lawmakers and Obama administration officials confronted the question time and again, about when to be specific and prescriptive and when to give the regulators latitude.
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"There is room for imposing more duties and responsibilities on the regulators, and the bill contains a number steps to do that," Assistant Treasury Secretary Michael Barr said in an interview. "But we also don't want to lock anything in stone."
It's a delicate balance. For the financial industry, the more leeway regulators have, the more they can influence the final rules.
"It gives them wiggle room and pressure points," said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a nonprofit organization in Washington.
Of prime interest to the industry will be the final rules on derivatives, how much money and assets they must have on hand as capital, and to what degree they will have to give up their securities trading activities.
On each of those matters, the House legislation, which passed in December, and the Senate's, which passed Thursday, leave key decisions to regulators. For the next few weeks, all eyes will be on House and Senate negotiators who are blending both bills. In many respects the bills are similar and there should be no conflicts.
Overall, the bills aim to prevent a recurrence of the crisis that deepened the recession and cost millions of Americans their jobs and their savings. The legislation would create an oversight council of regulators to watch for risks in the financial system. It would create a consumer protection entity to police lending and enshrine a mechanism for liquidating large, interconnected firms.
On Friday, Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank both said they expect to have a bill ready for President Barack Obama to sign by July 4.
When it comes to capital standards, the House prescribes a specific leverage cap on financial institutions of 15-1 debt-to-net capital ratio. The Senate requires banks with more than $250 billion in assets to meet capital standards at least as strict as those that apply to smaller banks.
But policymakers are taking a second look at the Senate provision, saying that standard could have unintended consequences. The final capital standards could be left to the government bank overseers.
Likewise, the legislation requires that most derivatives deals be carried out through central clearing houses that would guarantee payment and require the parties to post collateral. Deals that are not cleared would require the parties to post more capital, but the bill does not specify the amount.