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House Approves Historic Financial Overhaul Bill

The House approved a legislative package of historic sweeping financial reforms Friday, but the vote in the Democratically-controlled chamber was closer than many had predicted.

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CNBC.com Illustration

The 1,300-page "Wall Street Reform and Consumer Protection Act" was approved by a 223-202 margin, meaning more than a few of the 262 Democrats in the House joined Republicans in opposing the landmark legislation.

The bill has 10 major pieces, covering everything from too-big-to-fail firms to derivatives trading to banking regulation.

Some of the bill's tougher measures, such as the creation of a consumer financial protection agency and guidelines on executive compensation, were less popular than others on a committee level, which may have foreshadowed today's outcome.

The vote caps some seven months of work in the House Financial Services committee chaired by Rep. Barney Frank (D-Mass).

When it began working on the first of the bill’s many parts in June, there was some hope President Obama—whose economic team laid out a blueprint for Congress—would sign the bill into law by year's end.

That is no longer a possibility.

The Senate’s version of the complicated and controversial bill meant to prevent another financial crisis is in a state of limbo. Its chief sponsor, Sen. Chris Dodd (D-Conn.), who chairs banking committee, prepared a draft version but encountered significant opposition on a number of issues at the committee level from both Democrats and Republicans.

Committee negotiations are under way, but there's little chance of a vote in the near future, even if a draft bill is agreed upon.

The Senate and House versions differ in a number of key areas, including the regulatory structure for the banking industry. Dodd, for instance, would consolidate the regulatory authority of four agencies, including the Federal Reserve, into one new entity. Frank’s bill would only consolidate the activities of two agencies into one, leaving some jurisdiction to the Fed and the Federal Deposit Insurance Corporation.

Key Senate Republicans are thought to favor the less radical approach of the House bill.

The White House offered its first proposals on reform in late February, when the financial crisis was still a major threat to the economy. Since then, the need to pass major reforms has become less urgent for some in Congress.

In a statement after the vote, Treasury Secretary Timothy Geithner said: "House passage of this bill moves us an important step closer to meeting the President’s objectives for reform."

Republicans continued to criticize the bill. Rep. Jeb Hensarling (R-Texas), who helped craft the GOP's reform plan, called it "the most sweeping, draconian—some might say radical—piece of legislation to regulate our economy since the New Deal" and "takes a major step toward institutionalizing the United States as a political economy."

Industry reaction was generally supportive, but not without constructive criticism.

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"While we may disagree on certain policy details, there is no doubt that the industry shares the same goal of reforming our financial system as President Obama and the Congress," the Securities Industry and Financial Markets Association said in a statement. "We stand committed to further constructive engagement on these issues as the legislative process moves forward."

The two versions of the bill, regardless of the Senate's final form, are likely to go through a complicated reconciliation process, wherein the two chambers have to hammer out a compromise version.

The reform process has also been complicated by something of a populist revolt in Congress against the unchecked powers of the Federal Reserve and the policies of Chairman Ben Bernanke, who used a variety of aggressive and unconventional measures to stabilize Wall Street and the financial system during the crisis.

Bernanke, who faces a Senate confirmation vote on a second term Dec. 17, along with Geithner, has become a lightning rod for critics of White House intervention in the private sector, both under the Obama and Bush administrations.

House Republicans introduced a plan that would limit the Fed’s authority to monetary policy and also address the role of the government-sponsored mortgage giants Fannie Mae and Freddie Mac in the financial crisis. The House legislation on its way to the floor next week does not specifically address the future structure or role of the two entities although some of its provisions clearly apply to them.

Bill Highlights:

Consumer Protections: Createsthe Consumer Financial Protection Agency (CFPA), a new, independent federal agency solely devoted to protecting Americans from unfair and abusive financial products and services.

Financial Stability Council: Creates an inter-agency oversight council that will identify and regulate financial firms that are so large, interconnected, or risky that their collapse would put the entire financial system at risk. These systemically risky firms will be subject to heightened oversight, standards, and regulation.

Dissolution Authority and Ending “Too Big to Fail”: Establishes an orderly process for dismantling large, failing financial institutions like AIG or Lehman Brothers in a way that ends bailouts, protects taxpayers, and prevents contagion to the rest of the financial system.

Executive Compensation: Gives shareholders a “say on pay”—an advisory vote on pay practices including executive compensation and golden parachutes. It also enables regulators to ban inappropriate or imprudently risky compensation practices, and it requires financial firms to disclose any compensation structures that include incentive-based elements.

Investor Protections: Strengthens the SEC’s powers so that it can better protect investors and regulate the nation’s securities markets. It responds to the failures to detect the Madoff and Stanford Financial frauds by ordering a study of the entire securities industry that will identify needed reforms and force the SEC and other entities to further improve investor protection.

Regulation of Derivatives: Regulates, for the first time ever, the over-the-counter (OTC) derivatives marketplace. Under the bill, all standardized swap transactions between dealers and “major swap participants” would have to be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring.

Mortgage Reform and Anti-Predatory Lending: Would incorporate the tough mortgage reform and anti-predatory lending bill the House passed earlier this year. The legislationoutlaws many of the egregious industry practices that marked the subprime lending boom, and it would ensure that mortgage lenders make loans that benefit the consumer. It would establish a simple standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.

Reform of Credit Rating Agencies: Addresses the role that credit rating agencies played in the economic crisis, and takes strong steps to reduce conflicts of interest, reduce market reliance on credit rating agencies, and impose a liability standard on the agencies.

Hedge Fund, Private Equity and Private Pools of Capital Registration: Fills a regulatory hole that allows hedge funds and their advisors to escape any and all regulation. This bill requires almost all advisers to private pools of capital to register with the SEC, and they will be subject to systemic risk regulation by the Financial Stability regulator.

Office of Insurance: Creates a Federal Insurance Office that will monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis and undermine the entire financial system.