The Senate is weighing the most sweeping rewrite of financial rules since the Great Depression, landmark changes aimed at preventing a recurrence of the crisis that knocked the financial system to its knees two years ago.
The House already has passed its version of the bill, which proponents say would improve oversight of complex investments and give regulators the tools to address looming financial threats.
Here are some questions and answers about what would change under the proposed financial overhaul:
Q: How might the Democrats' plan make crises less likely?
A: A new council would monitor risks to the financial system — including speculative bubbles and activities by companies that are not overseen by traditional bank regulators.
Before the crisis, companies that made the highest-risk mortgage loans escaped meaningful oversight. The bubble in home values allowed banks and investors to spread trillions of dollars in risky mortgage debt through the financial system.
To prevent that from recurring, the council would look for asset bubbles, would flag any financial company deemed to pose a threat and would subject those companies to tighter regulation.
The Federal Reserve would regulate nonbank financial firms that could endanger the whole system. They would have to keep more money in reserve to protect against future losses, and would create "living wills" to make it easier to dissolve them if they teetered.
The bill passed by the House also would put the biggest banks under the Fed. The Senate bill, in its current form, would leave them with their current regulators.
Q: What would happen if a crisis seemed imminent?
A: Regulators could close down firms that appear to pose a risk. They would pay off the companies' financial obligations using money collected from the biggest financial firms. The "bailout money" would come from fees on the biggest financial companies.
Proponents say the new system would prevent panics like the one that followed Lehman Brothers' failure by making it clearer to other banks how failing financial companies will be wound down.
When Lehman filed for bankruptcy protection in September 2008, its business partners feared they wouldn't be repaid the money Lehman owed them. That made them reluctant to deal with other banks, because they didn't know which would be the next to fall.
Q: Would anything change for big banks like Goldman Sachs and JPMorgan Chase?
A: The biggest banks would be forced to keep extra capital to protect them against future losses, and they would lose two lucrative business lines: Proprietary trading and derivatives.
The bills would ban banks from investing for their own benefit — a practice known as proprietary trading.
They also would not be allowed to sell derivatives — complex investments whose values depend on the price of some underlying asset. Corn futures and stock options are some of the simpler derivative products.
Before the meltdown, derivatives became a tool for financial speculation. Some companies, like AIG, could not meet their financial obligations under the derivative contracts they sold. Others, like Goldman Sachs, used derivatives to create side bets on the market. Those extra risks magnified the impact of the housing downturn.
Q: Would derivatives be allowed at all? Could companies other than banks still sell or hold derivatives?
A: Yes. Derivatives help all kinds of companies limit their losses from events like interest rate swings. The legislation aims to preserve those functions while making risky speculation less likely.
Under the proposed rules, most derivatives would be traded on exchanges, as stocks are traded now. They would pass through an extra intermediary that would take responsibility for them if the seller defaulted.
The measures are intended to prevent companies from taking risks they can't cover. AIG required a bailout totaling more than $180 billion because it sold insurance-like policies against default on hundreds of billions of dollars worth of bonds.
Companies that hold derivatives also would need to hold more collateral to show they could meet their financial obligations. Billionaire investor Warren Buffett wanted the bill to include language exempting existing derivatives from this requirement.
Q: Investors bought those mortgage investments before the crisis in part because they were rated as safe by credit rating agencies. Does the bill contain anything to address those unrealistically high ratings?
A: Yes. Investors could sue the agencies for assigning recklessly high ratings. In the past, courts have held that credit ratings are constitutionally protected free speech.
In addition, the agencies would have to register with the Securities and Exchange Commission. They would be required to disclose more details about how they determine their ratings and how accurate they've proved over time. The Senate bill would empower the SEC to revoke the registrations of agencies that consistently issue inaccurate ratings.
Rating agencies are paid by the companies whose products they rate. Experts say that creates a conflict of interest, since the customers typically want higher ratings and can threaten to take their business elsewhere.
The Senate bill would require a study of this conflict. The House version would direct the SEC to either bar the conflicts or require rating agencies to disclose their ties to banks.
Q: Would anything change for regular people?
A: A new authority would oversee consumer products like mortgages and credit cards. Proponents say this would prevent the kind of risky lending that contributed to the crisis.
The new authority would decide which products are appropriate and which are too likely to leave consumers unable to repay.
By regulating products instead of companies, the new authority also would make it harder for nonbank lenders to escape oversight. New Century Financial Corp. and American Home Mortgage Investment Corp. did some of the riskiest lending before the financial crisis. They received little attention from federal regulators responsible for keeping banks safe.
The Senate bill would place the consumer agency inside the Fed, but would give it some independence. The House bill would create a separate agency.
Q: Didn't all this start with mortgages? What would change there?
A: Companies that sell bundles of debt — such as mortgages or credit card debt — would have to keep at least 5 percent of the packaged loans on their books. This would give the firms some "skin in the game," making them less likely to make bad loans and then offload them to other companies.
The House would order regulators to set standards so mortgages could go only to borrowers with the resources to repay them. It would create new rules to crack down on predatory lending.
Q: Are all these proposals likely to make it into the final bill?
A: The Senate has just begun debate, and major changes are expected. Republicans and the financial industry oppose the provisions that would forbid big banks to have derivatives businesses or to invest for their own benefit.
Opponents also say the new authority over consumer finance goes too far. They argue it would create too much regulation, limiting consumers' access to credit and raising the costs for banks to comply.
These provisions could be modified as Democrats seek the 60-vote majority needed to get the bill through the Senate.
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