Sweeping regulations to tame Wall Street and protect consumers in dealings with lenders are on the verge of passing the House but their fate is hardly sealed.
Crucial pieces are still flashpoints, fiercely opposed by various sectors of the financial services industry and likely to be fought on the House floor and beyond.
Democratic Rep. Barney Frank, chairman of the Financial Services Committee, expects to be negotiating specific language right up until House debate on the bill opens Wednesday. Unresolved issues could end up as amendments on the floor, making their outcome uncertain.
At issue are provisions that could affect how home buyers obtain mortgages, how large firms transact complicated financial trades and how large financial institutions borrow money.
The legislation is aimed a preventing a repeat of last year's financial meltdown that plunged the nation into the worst recession since the Great Depression of the 1930s. And it constitutes the biggest rewriting of laws governing banks, investment houses and other financial institutions since the New Deal.
It establishes a regulatory oversight council, chaired by the Treasury secretary, to monitor the financial system and identify future threats.
Companies that are so large and interconnected that they pose a risk to the economy would face greater supervision by the Federal Reserve and would have to hold more capital to protect against losses. If they pose a grave danger, regulators could dismantle them, even if the companies are healthy.
Large nonbank financial firms that fail would be dissolved, with bond holders and creditors taking losses. Additional costs of failure would be covered by a pre-assessment on other large firms. The bill establishes rules on previously unregulated derivatives and other financial instruments. Financial companies' executive compensation practices also would come under the purview of regulators.
With the Senate putting action on its version off until next year, the House bill is the target for critics to chip away at some of these provisions. Here are some of the most contentious measures:
CONSUMER FINANCE PROTECTION
The bill establishes a federal Consumer Financial Protection Agency opposed by banks and other lenders while also allowing states to impose even tougher consumer protection laws against big banks. States could have stricter rules on how lenders issue mortgages or credit cards.
As a compromise, federal regulators could exempt, or pre-empt, national banks from state laws that "significantly interfere" with the bank's ability to do business. Democratic Rep. Melissa Bean and others want greater pre-emption for banks, a position strongly opposed by consumer advocates.
Frank acknowledged a floor fight over the provision was possible.
SECURED CREDITOR LOSSES
The legislation allows shareholders, unsecured creditors and bondholders all to be wiped out if the government has to take down a failing financial company. But it also subjects secured creditors to losses of up to 20 percent of their money. The provision, pushed by Federal Deposit Insurance Corp. head Sheila Bair, is intended to make secured creditors better assess the solvency of large financial institutions. Critics say it will hurt the large institutions because creditors will be less inclined to lend to them.
"That's controversial," Frank said. "I'm sure that will be debated on the floor."
Democratic Rep. Brad Miller, one of the authors of the 20-percent provision, argued that secured creditors would sustain losses only in an "extreme event ... a spectacular insolvency."
Over-the-counter derivatives are complex, often highly leveraged and largely unregulated instruments traded directly between buyers and sellers. They were blamed for accelerating last year's financial crisis. In pursuit of more transparency, the legislation would require most derivatives trades to go through clearinghouses. Financial companies dealing in the instruments would have to put more of their capital at risk.
But a lobbying push by Boeing Co., Caterpillar Inc., General Electric Co., Coca-Cola and other big companies persuaded lawmakers to exempt nonfinancial companies that use derivatives as a hedge against price, currency and interest rate changes rather than as a speculative investment.
The Obama administration wants fewer exemptions. Frank and Agriculture Committee Chairman Collin Peterson, a Democrat, are seeking to tighten language so that the exceptions don't become loopholes for speculative bets.
AUDITING THE FEDERAL RESERVE
The bill would authorize Congress' investigative arm, the Government Accountability Agency, to conduct a deep audit of the Federal Reserve, which sets the nation's monetary policy and also acts as a bank regulator.
The Fed staunchly protects its independence, and Fed Chairman Ben Bernanke, administration officials and congressional leaders have objected to an audit that would probe decisions on monetary policy.
"My fear is that if we were to take what might be perceived as an unpopular step, Congress would order an audit, which would be a way of essentially applying pressure, or be perceived as a way of applying pressure, to our policy decisions," Bernanke told senators last week.
But the idea of auditing the Fed has the support of more than 300 House members. While opposed to the measure, Frank says he will not try to remove it. Only about 30 senators support it.
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