Passage of financial overhaul is only half the battle
The Senate’s expected approval of financial regulatory reform this week closes more than a year of partisan wrangling over how to prevent a future economic meltdown. But the signing ceremony in the coming days by President Obama won’t mark the end of the high-stakes battle over remaking Wall Street.
It will be more like the halftime show.
Passage of the most sweeping overhaul of rules governing the financial industry since the Great Depression will kick off a monumental task by federal regulatory agencies — conducting dozens of studies and writing hundreds of specific new rules mandated by the legislation.
The Securities and Exchange Commission, by one analysis, is expected to hold nearly 100 rulemaking procedures resulting in hundreds of itemized regulations. Altogether, about a dozen federal agencies are expected to handle nearly 250 rulemakings, according to a report last week by the law firm Davis Polk & Wardwell.
Experts said the new law’s effectiveness would hinge on the lengthy and often mind-numbing process, which involves complicated areas such as financial derivatives, capital requirements for banks and risk-retention guidelines for financial firms.
Turning about 2,000 pages of broad legislative language into detailed regulations is expected to take years. It also will take place far from the public spotlight, opening a new front for financial industry lobbyists to try to water down provisions in legislation they have aggressively opposed.
“Their strategy right now is they are analyzing every word of every section of the bill, and everything that is defined and not defined, and they are preparing to confuse the regulators with comments and in meetings where they will try to undermine what Congress has done,” said Ed Mierzwinski, a director at consumer advocacy group U.S. Public Interest Research Group, which supported the bill.
Regulators have been preparing for the task, analyzing the legislation even as lawmakers have been revising it and getting ready to hire additional lawyers and other staff to assist in drafting the rules.
Financial institutions and interest groups also are gearing up for the complex rulemaking process, which will take place in the highly technical world of agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The legislation requires regulators to produce 67 studies and 22 reports and conduct 243 rulemaking procedures, according to Davis Polk, which eliminated double-counting for joint efforts among two or more regulators. The U.S. Chamber of Commerce, a key opponent of the bill, puts the numbers at 60 studies, 93 reports and 533 rulemakings.
Each one of those rulemakings, conducted under the arcane Administrative Procedures Act, can involve a host of specific definitions and guidelines for financial firms.
The mountain of new rules to be imposed on the industry has been one of the main arguments against its enactment. The American Bankers Assn. estimated that the overhaul would add 5,000 pages of new regulations for banks to follow.
“This will keep businesses extremely busy for years to come, not only in terms of the development of the rules, but how they’re interpreted and potential litigation that follows from that,” said Tom Quaadman, vice president of the chamber’s Center for Capital Markets Competitiveness.
He noted that the Sarbanes-Oxley accounting reforms passed by Congress in 2002 required only 16 rulemakings and six studies, but it still took more than two years for regulators to approve the final rules.
Lawmakers and administration officials said the huge task ahead for regulators is a necessary evil of such a far-reaching bill dealing with a highly complex industry.
The legislation aims to prevent future financial crises through a sweeping set of reforms, including establishing a bureau within the Federal Reserve to protect consumers in the financial marketplace, imposing tough regulations on financial derivatives, expanding shareholder rights and giving the government authority to seize and dismantle teetering firms whose failure could cause severe harm to the nation’s economy.
Lawmakers admit they lack the expertise to make specific technical determinations, such as how much derivatives trading qualifies a firm as a major player in the market or the percentage of total assets a firm must hold in capital. That expertise is in the purview of each agency.
Besides, were Congress to set such details into law, it would require a new law to make even small revisions that might become necessary as market conditions change or problems arise.
“You can’t eliminate human beings from regulation,” said Housing and Urban Development Secretary Shaun Donovan.
“Markets are dynamic, mortgage products and financial institutions will change over time, and one of the reasons we continue to be the strongest economy in the world overall is because we have continued to find ways to encourage innovation and have a flexible economy,” he said.
But one of the complaints about federal agencies was their inability to prevent the last financial crisis amid charges that regulators were too cozy with the companies they oversee.
Critics point to the power Congress gave to the Federal Reserve in 1994 to write rules protecting consumers from predatory lending. The Fed did not write those rules for 14 years, until well after the subprime mortgage market began to melt.
“There’s a great deal of cynicism in the public that the good things we’ve done in the bill will be undone by regulators who have very close relationships to big banks and the financial industry,” said Sen. Jack Reed (D-R.I.), a major supporter of the legislation who wants oversight hearings to start in September.
“We have a key role as soon as we pass this bill in making sure the regulators do the right thing and do it consistently,” he said.
Michael Greenberger, a University of Maryland law professor who supported tough regulation of derivatives, said his former experience as a regulatory official “says the battles will continue in the regulatory agencies.”
“Even where we think there’s clarity, you can lose it in implementation,” he said. “And those of us who worked so hard to make sure there is good legislation now will have to make sure we get good regulations.”
