The financial regulatory reforms approved Thursday by the Senate and sent to President Barack Obama will provide important consumer protections and place new restraints on the ability of banks to make the kinds of investments that contributed to the economic meltdown. The legislation is far from perfect, but it is the most sweeping overhaul of bank regulation since the Great Depression and a significant victory for the president.
The bill passed the Senate because three Republicans, Massachusetts' Scott Brown and Maine's Susan Collins and Olympia Snowe, dared to think for themselves, rose above partisanship and voted with Democrats for much-needed reform. As expected, Florida Democratic Sen. Bill Nelson voted for the bill. Republican Sen. George LeMieux voted against it and continues to be an obstacle to reform.
The bill covers plenty of ground. Companies that own commercial banks no longer will be able to speculate with their own profits, and the banks will be able to invest just 3 percent of their capital in private equity or hedge funds. Credit rating agencies that helped fuel the economic collapse by giving high marks to junk investments could be held liable for investors' losses if they act recklessly. A new council of regulators will look for threats to the financial system to head off another too-big-to-fail scenario — and the costs of shutting down those that do fail would be paid by the surviving companies instead of taxpayers. A new consumer protection office within the Federal Reserve will oversee such services as mortgages, credit cards and short-term loans.
Of course, the legislation should have been stronger. For example, an effort to require banks to spin off risky derivatives-trading operations was squashed. But the new law will require many of these sorts of trades to be more transparent. Now the financial lobbyists will focus on the regulators who will write the rules to enforce the law and fill in the blanks. The administration cannot allow the intent of the reforms to be watered down.
As Obama said after the bill passed, the economic crisis was largely the result of "recklessness and irresponsibility in certain corners of Wall Street.'' Nearly two years since Lehman Brothers collapsed and the crisis began to rapidly unfold, Congress finally has embraced fundamental change to the financial system. Whether the reforms would have prevented the economic meltdown is guesswork, but they will provide more transparency and regulatory tools to recognize and head off the next one much faster. While some Republicans already are calling for its repeal, the legislation is an important victory for the president and for consumers who are still paying a painful price for the worst economic crisis in generations.