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Future Of Financials w/ Former SEC Chairman

By know you’ve probably been bombarded with headlines trumpeting the biggest Wall Street overhaul since the 1930’s.

Or you’ve seen a list of sweeping changes that lie ahead for the financial services sector; A list like this one:

- a warning system for financial risks
- a powerful consumer financial protection bureau to police lending,
- forcing large failing firms to liquidate
- setting new rules for financial instruments that have been largely unregulated.

But what you probably haven’t heard is that the new regulations could stunt growth.



So says former SEC chairman Harvey Pitt on Fast Money.

“I think the regulation could stunt growth. The costs are going to be astronomical....every time a bank wants to do something now it has to go through 9 additional people who have been added as a layer onto the review process and that will increase costs of lobbyists, lawyers and more."

To pay for the costs of the bill, negotiators agreed to assess a fee on banks with assets of more than $50 billion and hedge funds of more than $10 billion in assets to raise $19 billion over 10 years.

However Pitt believes those fees will ultimately get passed along. "The people who are going to pay for it are people like you and me," he says.

So what are we paying for? Following are highlights of the compromise legislation to overhaul financial rules:

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OVERSIGHT

A 10-member council of regulators led by the Treasury secretary will monitor threats to the financial system. It will decide which companies were so big or interconnected that their failures could upend the financial system. Those companies will be subject to tougher regulation.

If such a company teetered, the government could liquidate it. The costs of taking such a company down will be borne by its industry peers.

The council could overturn new rules proposed by the consumer protection agency. That's supposed to happen only to rules deemed a threat to the financial system.

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CONSUMER PROTECTION

A new independent office will oversee financial products and services such as mortgages, credit cards and short-term loans. The office will be housed in the Fed.

Auto dealers, pawn brokers and others will be exempt from the bureau's enforcement. For community banks, the new rules will be enforced by existing regulators.

The oversight council could block rules proposed by the consumer agency, but only if they determine the regulations will threaten the system.

Currently, consumer protection is spread among various bank regulators.

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FEDERAL RESERVE

The Federal Reserve will lead the oversight of big, interconnected companies whose failures could threaten the system. Those companies will be identified by the council of regulators.

The Fed's relationships with banks will face more scrutiny from the Government Accountability Office, Congress' investigative arm. The GAO could audit emergency lending the Fed made after the 2008 financial crisis emerged. It also could audit the Fed's low-cost loans to banks, and the Fed's buying and selling of securities to implement interest-rate policy.

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CAPITAL CUSHIONS

Big banks will have to reserve as much money as small banks do to protect against future losses. But big banks will have to replace hybrid forms of capital called trust preferred securities with common stock or other securities. Banks with under $15 billion in assets will not have to replace those securities, but could not add more to their reserve funds.

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DERIVATIVES

Derivatives are financial instruments whose values change based on the price of some underlying investment. They were used for speculation, fueling the financial crisis. Under current law, they have been traded out of the sight of regulators. The new law will force many of those trades onto more transparent exchanges.

Banks will continue trading derivatives related to interest rates, foreign exchanges, gold and silver. Those deals earn big profits for a handful of Wall Street titans.

But riskier derivatives cab not be traded by banks. Those deals will run through affiliated companies with segregated finances. The goal is to protect taxpayers, since bank deposits are guaranteed by the government.

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BANK RESTRICTIONS

Companies that own commercial banks can no longer make speculative bets for their own profits.

A related provision will have banned banks from investing in private equity and hedge funds. The final compromise scaled that back. Banks will be allowed to invest up to 3 percent of their capital in private equity and hedge funds.

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EXECUTIVE PAY

Shareholders will vote on executive pay packages. But the votes will not be binding. Companies could ignore them.

The Fed will oversee executive compensation to make sure it does not encourage excessive risk-taking. The Fed will issue broad guidelines but no specific rules. If a payout appeared to promote risky business practices, the Fed could intervene to block it.

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CREDIT RATING AGENCIES

Credit rating agencies that give recklessly bad advice could be legally liable for investor losses. They will have to register with the Securities and Exchange Commission.

Regulators will study the conflict of interest at the heart of the rating system: Credit raters are paid by the banks that issue the securities they rate. Before the crisis, they bowed to pressure from the banks, lawmakers say. That's why the agencies gave strong ratings to mortgage investments that were basically worthless.

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MORTGAGE LOANS

Lenders will have to make sure mortgage borrowers can afford to repay.

Lenders will have to disclose the highest payment borrowers could face on their adjustable-rate mortgages. Mortgage brokers could no longer receive bonuses for pushing people into high-cost loans.




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Trader disclosure: On June 25, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Kinahan owns (C); Kinahan owns (WFC) and short puts; Kinahan owns (AMTD); Kinahan owns (AXP); Kinahan is short (SPY) options; Finerman and Finerman’s Firm owns (AAPL); Finerman’s Firm owns (AEO); Finermans’ Firm owns (ANF); Finerman’s Firm owns (BAC) stock and calls; Finerman and Finerman’s Firm own (BAC) preferred; Finerman and Finerman’s Firm owns (BBY); Finerman owns (BP) calls; Finerman and Finerman’s Firm owns (C); Finerman and Finerman’s Firm own (CVS); Finerman owns (GLW); Finerman & Finerman’s Firm owns (GOOG); Finerman & Finerman’s Firm owns (HPQ); Finerman & Finerman’s Firm owns (IBM); Finerman & Finerman’s Firm owns (JPM) stock & calls; Finerman’s firm owns (PM); Finerman’s Firm owns (RIG); Finerman’s Firm owns (TGT); Finerman’s Firm owns (WMT); Finerman’s Firm is short (IJR); Finerman’s Firm is short (IWM); Finerman’s Firm is short (MOY); Finerman’s Firm is short (SPY); Edwards owns (PM)

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Michael Block
***No Disclosures***

Harvey Pitt
***No Disclosures***




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