Financial Reform

Here is a quick bullet-point view on the product of the Washington Sausage Factory….

➢ Oversight
o Financial Services Oversight Council
• Monitors financial markets
• Powers to determine tougher regulations across some institutions
• Power to break up large financial firms if they are deemed to pose a “threat”

➢ Consumer Protection
o Within Federal Reserve
o Power over credit cards, mortgages and loans
• Auto dealers exempt
• Regulators can appeal council by a veto 2/3 vote
• Case by case actions

➢ Federal Reserve
o Retains supervision over bank-holding companies
o Polices large interconnected non-bank institutions based on oversight council determination
o With council approval, power to break up large financial firms
o To be audited by Congress’s investigative arm for emergency lending around 2008 crisis.
• Low cost loans Fed provides to banks, and securities actions will be audited.

➢ Bank Capital Standards
o Higher risk and size based capital standards for Banks with more than $250 bio in assets
o Certain hybrid securities no longer to be considered Tier 1 capital
o Banks < $15 bio retain trust preferred securities, while large banks must phase them out

➢ Derivatives
o Majority to be on a regulated public exchange. Banks must spin off swaps/swap shops?
o Banks can continue to trade derivatives related to interest rates, FX, Gold and silver
o Banking companies have to use own non-bank funds to trade riskier derivatives
o Fed assistance for derivative trading losses prohibited

➢ Bank Restrictions
o Commercial banking ops not allowed to trade in speculative investments; Allowed up to 3% of capital in private equity and hedge funds (Volcker Rule) - Total? Per Fund?

➢ Corporate Governance
o Non binding common vote on executive pay
o Fed can set standards on “excessive compensation that is unsafe and unsound”

➢ Rating Agencies
o Agencies must register with SEC; increased liability standards
• SEC to study practice of credit rating shopping
• SEC to determine if independent board is needed

➢ Mortgage Risk
o Lenders must obtain proof from borrowers regarding income / repayment capacity
o Lenders must disclose max amount that borrowers could pay on ARMs
o Lenders banned from incentives to push people into high priced loans

➢ Insurance
o New Office of National Insurance with Treasury
• Monitor industry
• Coordinate international insurance issues
• Identify issues that would lead to systemic crisis

I say
- Could be better, but could have been much worse
- The proof is in the eating