WHILE THE big bailouts of 2008 gave Congress a mandate to constrain the excesses of the financial system, the House and Senate have each passed bills that make major concessions to the status quo. But a conference committee now working to reconcile the two bills can salvage the effort. If conferees adopt the toughest parts of the House and Senate bills, the result would be a significant improvement in the oversight of the financial system. The final bill, set to be released by July 4, should be judged by a few key measures. One is the strength and independence of the new consumer financial protection agency. The House and Senate versions both create a new office with its own source of funding, rule-making authority, and the power to enforce its rules. Ideally, it should be an independent entity, rather than a unit of the Federal Reserve, as the Senate proposes.
But the precise structure matters less than the scope of the agency’s mission. The House version exempts auto dealers, real estate brokers, and accountants from direct agency oversight. These exemptions ought to be eliminated; otherwise the agency will be protecting consumers from only some of the forces that account for predatory practices.
The conferees should also strip out regulatory exemptions for banks with less than $10 billion in assets. More than 95 percent of all US banks fit into this exempted category. The new agency should be able to examine a greater proportion of those banks.
To reduce financial risk in the future, reform legislation should adopt former Fed chairman Paul Volcker’s call to prohibit banks from trading for their own account and from owning hedge funds or private equity firms. Both the Senate and House allow regulators to study the issue and decide whether to impose a trading ban. This gaping loophole should be closed.
There must be no diluting of the requirement in both the Senate and House bills that derivatives — complex securities, such as those backed by subprime mortgages, that derive their value from the performance of some other financial transaction — be traded on public exchanges and approved by central clearinghouses. Until now, they were traded in private transactions, and were a principal cause of the tidal wave that washed away Lehman Brothers; they would have swamped AIG if not for a federal bailout.
The final bill should also preserve an amendment from Senator Susan Collins, Republican of Maine, that requires that big banks hold a minimum amount of capital to cover losses in risky ventures. This measure offers a common-sense protection for the entire economy.
Two years ago, the financial system came unglued because of opacity in the markets, excessive risk by banks, and an indifference to how overzealous mortgage lending affected real-world consumers. Since then, intense lobbying by Wall Street and other special interests has caused the sense of urgency to dissipate. But if Americans can have regulations to protect their water, their meat, and their baby toys, they should not be denied the strictest possible regulation to protect their money.
