The financial reform package awaiting final congressional action this week is a bundle of tough new rules to close regulatory gaps along with some unsatisfying shortcomings. Despite the limitations, consumers and investors would obtain vital protections and banks would face new constraints on speculative trading and risk-taking, making it the most sweeping overhaul of bank regulation since the Great Depression.
Now, with the death of Sen. Robert Byrd, D-W.Va., there are concerns there won't be enough votes in the Senate to defeat a Republican-led filibuster. But failure to respond to the excesses that nearly led the banking system to collapse two years ago would be indefensible. It's past time for this financial reform.
Where the measure best succeeds would be in giving regulators new tools to rein in the excesses of Wall Street and the nation's lenders. A Financial Services Oversight Council would monitor systemic risks to avoid a too-big-to-fail situation. The Securities and Exchange Commission would have markedly expanded power, giving the agency sway over hedge funds and credit rating agencies. A Consumer Financial Protection Bureau, housed within the Federal Reserve but wielding substantial independence, would police credit card companies and lenders' deceptive products.
Under the bill, troubled institutions could be seized and liquidated and the remaining large financial firms would be billed for the cost. For the first time, the shadow banking system operated by hedge funds and private equity funds would come under regulatory control. And the $600 trillion derivatives market — those complex instruments that accelerated the meltdown — would be largely brought into the light, subject to regulatory oversight and traded transparently through exchanges.
All this is good. But many of the details of how the new rules would be applied are to be worked out by regulators, who must stand up against the power of financial lobbyists. History has shown, including recently, that often regulators don't exercise the power they have. This plan repeats that flawed expectation by relying on the "super regulator" to do the right thing at the right time rather than make clear prohibitions in law.
The new bill also falls short on the Volcker Rule that would ban banks from gambling with their own capital — known as proprietary trading — if they take federally insured deposits or have access to the Federal Reserve's discount window. A concerning compromise would let banks invest in risky hedge and private equity funds up to 3 percent of capital, a substantial amount for the nation's largest banks.
The derivatives measure originally offered by Sen. Blanche Lincoln, D-Arkansas, also was watered down. It initially required banks to spin off risky derivatives-trading operations, so not to endanger the solvency of the bank. But the final legislation would liberally allow banks to retain operations for interest-rate swaps, foreign-exchange swaps and others, exceptions that virtually swallow the rule.
In a sensible world, after what Wall Street has wrought, reform would have substantial support from both parties. But in today's deeply partisan Congress, sensibility is often sacrificed for political gain. This is a must-pass bill, and any member of Congress voting against it is on the wrong side of history.