Congressional negotiators wrap up work on financial reform legislation

Almost two years after the worst financial crisis since the Great Depression, congressional negotiators completed work Friday on landmark legislation designed to prevent a recurrence by dramatically expanding the government’s oversight of the financial industry.

The regulatory overhaul, expected to get final approval by the House and the Senate next week, would affect all aspects of the financial system, from the pennies banks charge merchants each time they swipe a customer’s debit card to the multitrillion-dollar market for complex derivatives.

The final details, hashed out in a marathon 20-hour session, ended a yearlong process that saw Wall Street firms and major business groups lobby aggressively against new regulations.

The sweeping legislation — about 2,000 pages long — would create a new agency to protect consumers in the financial marketplace, empanel a council of regulators to monitor the financial system for major risks, impose tough regulations on complex financial derivatives, and grant the government power to seize and dismantle teetering firms whose failure would pose a danger to the economy.

The bill also outlaws some of the riskiest mortgage lending practices that led to the housing bubble, including loans written with no documentation of the borrowers’ income.

Lawmakers on a joint conference committee labored until dawn to reconcile House and Senate versions of the legislation in time for President Obama to brief foreign leaders on the completed deal at the Group of 20 economic summit in Canada.

“Our economic growth and prosperity depend on a strong, robust financial sector, and I will continue to do what I can to foster and support a dynamic private sector,” Obama said Friday before leaving the White House. “But we’ve all seen what happens when there’s inadequate oversight and insufficient transparency on Wall Street.”

“The reforms making their way through Congress will hold Wall Street accountable so we can help prevent another financial crisis like the one that we’re still recovering from,” the president said.

Wall Street stands to take a major hit under new rules that would limit the risks they take, force them to spin off parts of their lucrative derivatives operations and give shareholders more say in executive compensation.

The bill also threatens to overwhelm small banks with costly new regulations, said Edward Yingling, president of the American Bankers Assn.

“This bill will, in the end, add well over a thousand pages of new regulations for even the smallest bank,” Yingling said. “As a result of this volume and the new restrictions, many small banks are telling us they will simply have to sell out to larger institutions that have the staff to deal with the massive volume of new reports and rules.”

Business groups and most congressional Republicans also opposed the new Consumer Financial Protection Bureau, the centerpiece of the overhaul package. Opponents said the agency was likely to put new restrictions on credit cards and other consumer loans, which would result in higher costs and fewer choices for consumers.

In a defeat for the administration, however, auto dealers and their business allies managed to win an important exemption: Dealers who arrange consumer auto loans (but don’t lend their own money) will not come under the agency’s oversight.

Key Democrats and the administration pushed hard to include dealer-arranged financing in the bureau’s purview. But auto dealers and their allies argued aggressively that the additional oversight wasn’t needed and would raise the prices of cars while hurting the struggling auto industry.

Despite that setback, consumer advocates said the bill’s establishment of a powerful watchdog agency was a major step forward.

The depths of the financial crisis and the deep recession it triggered helped supporters overcome the army of lobbyists deployed by the industry, said Ed Mierzwinski, consumer program director of U.S. Public Interest Research Group, a consumer advocacy federation.

“It’s not just some complicated thing in Washington. You see it when your neighbor’s house is boarded up or you’re laid off and you open up your 401(k) and … it reads like a Stephen King novel,” he said. “The public was affected deeply by this crisis.”

Lawmakers are racing to meet Obama’s July 4 deadline for passing his top legislative priority heading into November’s midterm elections. Lawmakers christened the bill the Dodd-Frank Act after the two main architects, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D-Mass.).

“We’ve done something that’s been badly needed, sorely needed for a long time, and we hope will protect our country, create the kinds of jobs and wealth and optimism and trust once again in our financial systems that’s been so missing,” Dodd said after the final vote shortly before 6 a.m. EDT. “It’s a great moment.”

Treasury Secretary Timothy F. Geithner said the final bill was strong and “provides crucial momentum for global financial reform.”

To pay for the increased oversight of Wall Street and the rest of the financial industry, lawmakers in their last move on the bill Friday agreed to impose a $19-billion tax on the largest financial institutions. The money would cover the costs of the legislation for the next 10 years.

“It was the collective errors of the financial industry that led to this set of problems,” Frank said. “We think to go to the Goldman Sachses and the JPMorgan Chases and the Blackstones and other large hedge funds and ask them to collectively make a fairly small contribution is reasonable.”

The levy would be assessed on financial institutions with more than $50 billion in assets and hedge funds with more than $10 billion in assets under management. The precise formula would be determined by regulators.

The conference committee’s final vote split along party lines. House members voted 20-11 to approve the revised legislation, and senators voted 7-5. Republicans, who sharply criticized the legislation as an unwarranted government intrusion into the private sector, all voted against the final bill, which will be sent to the House and Senate for approval.

The thorniest issues were left until the end of the two-week negotiations, among them a decision to exempt most auto dealers from oversight by the new consumer agency.

The sticking point on derivatives was a controversial provision that would force banks to spin off their derivatives businesses as part of new regulations of the complex financial instruments.

Early Friday, House Agriculture Committee Chairman Collin C. Peterson (D-Minn.) announced a compromise. The proposal would limit the types of derivatives banks could trade to such instruments as interest rates, foreign exchange rates, gold and silver and hedging a bank’s risk.

Other derivatives, including credit default swaps that were at the heart of the financial crisis, could only be traded by a bank affiliate. Banks would have up to two years to spin off those businesses.

The leading proponent, Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.), negotiated throughout the day with Peterson, White House officials, centrist Democrats and members of the New York congressional delegation, all of whom have concerns about overly restrictive derivatives regulations.

Members of the conference committee also agreed to a provision known as the Volcker rule, after former Federal Reserve chairman and current Obama advisor Paul Volcker. The rule would limit so-called proprietary trading — investments of the bank’s funds for its own profit instead of its clients’ — as well as investments in hedge funds and private equity funds.

Late Thursday, the conference committee accepted a proposal by Dodd to strengthen the Volcker rule’s language while also allowing some exceptions.

The provision would mandate a ban on risky investments instead of simply allowing regulators to implement such a ban after a study. But it also would allow banks to make small investments in hedge funds and private equity funds, limiting such investments to 3% of a bank’s capital.