After three Republican senators threatened to vote against the financial reform bill unless its $18 billion bank fee was removed, Democrats briefly reopened conference committee proceedings today and voted to remove it:
Conference negotiators voted to eliminate the proposed tax and, in its place adopted a new plan to pay the projected five-year, $20 billion cost of the legislation. The new plan would bring an early end to the Troubled Asset Relief Program, the mammoth financial system bailout effort enacted in 2008, and redirect about $11 billion toward heightened regulation of the financial industry. The conferees also voted to increase the reserve ratio of the Federal Deposit Insurance Corporation but specified that small depository institutions — those with less than $10 billion in consolidated assets — be exempt from paying any increase.
If Maria Cantwell, who voted against the bill on its first go-around, agrees to support the final conference report, that will give Democrats 57 votes. If the removal of the bank tax buys the support of Republicans Susan Collins, Olympia Snowe, and Scott Brown, that will give them 60 votes and the bill will pass. So cross your fingers and hope this does the trick.
That is, cross your fingers if you think this bill is worth passing in the first place. And since I got into a Twitter argument with Marcy Wheeler last night about that very subject, here's a brief rundown of what we'll get out of it:
- Companies selling mortage-backed securities will be required to retain a portion of the risk on their own books. The originate-to-distribute model, where dealers bundled up loans and immediately turned around and sold off the whole package, created a system where bundlers had no incentive to make sure the underlying loans were any good. This provision helps rein this in.
- Commercial banks will face restrictions on the amount of proprietary trading they can do. This is the so-called Volcker Rule, and although it was watered down in conference (banks can still trade up to 3% of their capital for their own accounts) it's still a pretty good safety valve for the banking industry.
- A Consumer Finance Protection Agency will be set up within the Federal Reserve. I was initially opposed to housing the CFPA at the Fed, but I came around to the idea based on the argument that this will allow the CFPA to offer higher salaries and attract better talent. This is a significant win, and Elizabeth Warren says she's pretty happy with it.
- Derivatives trading will largely be forced onto public exchanges. Certain standard derivatives will still be offered over-the-counter, which is too bad, but more complex instruments like credit default swaps will be made considerably safer by this rule.
- Dick Durbin's interchange regulation for debit cards was adopted. This doesn't affect the safety and soundness of the banking system, but it's a good step forward for transparency and consumer protection.
- Capital requirements for large banks will be increased. Together with the Basel III requirements currently under negotiation, this is a key step toward making the entire financial system safer and less leveraged.
- Other changes that are good, though watered down from where they ought to be, include ratings agency reform, resolution authority, systemic risk regulation, and SEC authority over hedge funds.
This doesn't go as far as it should. There should be greater constraints on leverage. The prop trading and derivatives trading regs were weakened more than they should have been. Some critics think the big banks should have been forcibly broken up.
Still, even in its weakened state, the bill is stronger than it was a few months ago and it will go a long way toward reducing the size and profitability of the banking sector — which is why the banking industry is fighting it tooth and nail. Here's the Wall Street Journal:
A weekend of number-crunching left no doubt that the changes would hurt the bottom line at thousands of banks, brokerage firms and other financial companies. "This is wrong, and we have one last chance to do something about it," the American Bankers Association wrote in an email to its members, urging them to write opposition letters to members of Congress. Financial-industry lobbyists are aiming at Republicans who voted in favor of the Senate version, hoping to change their position when the final bill comes up for a vote. "You keep playing until the whistle blows," says ABA spokesman Peter Garuccio.
Inside most banks, the mood already has shifted to assessing how much revenue and earnings are likely to evaporate if the bill becomes law — and how to make up for the forgone money. Keith Horowitz, an analyst at Citigroup Inc., estimated the legislation would reduce annual earnings per share for big U.S. banks by 6%, down from his previous estimate of 11%.
This is half a loaf, but at this point the only credible alternative is doing nothing. There's not enough time to draft a new bill this year, and after November there's no chance of passing anything at all. Given the alternatives, anyone who cares about financial reform should support this bill.