Wall Street reform
Encyclopedia
Wall Street Reform or Financial Reform was signed by President of the United States
Barack Obama
on July 22, 2010. Since the economic crisis of 2007-09 (millions of jobs were lost, businesses failed, house prices dropped, and savings were washed out), there was an ongoing debate taking place regarding the insufficient oversight and regulation of the US financial system, non-regulated OTC derivative market, and non-existence of consumer protection
authority which was the major cause of financial crises. The law was passed in order to make US financial system more transparent and accountable, avoid another economic crisis, and to ensure that there is a system in place that will work towards protecting tax payers’ money. Some of the major topics it includes are creation of the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, limiting large complex financial instruments and making derivative market more transparent, many new requirements and oversight of Credit Rating Agencies
, giving shareholders a say on CEO’s bonuses and many others with the main focus of strengthening economy and protecting consumer.
of 1933 placed a "wall of separation" between banks and brokerages, which was largely repealed by the Financial Services Modernization Act of 1999. Though some commentators regard the restoration of the 1933 bill as crucial, even calling it "the most vital element of Wall Street reform", House Democratic leaders refused to allow an amendment by Rep. Maurice Hinchey
(D-NY) to restore Glass-Steagall as part of the 2009 Frank bill. Hinchey introduced his proposal as a separate bill, the Glass-Steagall Restoration Act of 2009. Nonetheless, the "Volcker rule" proposed by the Obama administration has been described as a "new Glass-Steagall Act for the 21st century", as it establishes stringent rules against banks using their own money to make risky investments.
, by Sen. Paul S. Sarbanes (D-MD
) and Rep. Michael G. Oxley (R
-OH
), was signed into law by George W. Bush
in July 2002. The bill was enacted as a reaction to a number of major corporate and accounting scandals
including those affecting Enron
and WorldCom.
s (Senate); how exactly the Federal Deposit Insurance Corporation
(FDIC) will wind down or bail out large institutions which fail; the circumstances under which large institutions could be broken up; a 15 to 1 leverage limit in the House bill; the terms of a Fed audit (continuous as in the House bill or one-time as in the Senate bill); both bills include the Volcker rule which prohibits proprietary trading
by bank holding companies, but both have a caveat which allow for regulators to overrule the rule; both bills propose to regulate credit rating agencies, but the Senate's bill is much stronger.
(D-MA
), passed by the House of Representatives in December 2009, and awaiting action by the Senate as of April 2010.
) on April 15, 2010. Dodd's bill included a $50 billion liquidation fund which drew criticism as a continuing bailout, which he was pressured to remove by Republicans and the Obama administration. The Senate bill passed on May 20, 2010.
based on advice by Paul Volcker
, and a draft of the proposed legislation was prepared by the U.S. Treasury Department. It limited any one bank from holding more than 10% of FDIC-insured deposits, and prohibited any bank with a division holding such deposits from using its own capital to make speculative investments. The Volcker rule faced heavy resistance in the Senate and was introduced as part of the subsequent Dodd bill only in a limited form.
, a new multi-authority oversight body called the Financial Stability Oversight Council of regulators will be established. The council will consist of nine members including regulators from the Federal Reserve System
, U.S. Securities and Exchange Commission, Federal Housing Finance Agency
, and many other agencies. The main purpose of the council is to identify risk in the Financial system
. Also, the council will look at the interconnectivity of the highly leveraged financial firms and can ask companies to divest holdings if their structure poses a great threat to the Financial system. The council will have a solid control on the operations of the leveraged firms and also help in increasing the transparency.
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
on July 22, 2010. Since the economic crisis of 2007-09 (millions of jobs were lost, businesses failed, house prices dropped, and savings were washed out), there was an ongoing debate taking place regarding the insufficient oversight and regulation of the US financial system, non-regulated OTC derivative market, and non-existence of consumer protection
Consumer protection
Consumer protection laws designed to ensure fair trade competition and the free flow of truthful information in the marketplace. The laws are designed to prevent businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors and may provide additional...
authority which was the major cause of financial crises. The law was passed in order to make US financial system more transparent and accountable, avoid another economic crisis, and to ensure that there is a system in place that will work towards protecting tax payers’ money. Some of the major topics it includes are creation of the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, limiting large complex financial instruments and making derivative market more transparent, many new requirements and oversight of Credit Rating Agencies
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
, giving shareholders a say on CEO’s bonuses and many others with the main focus of strengthening economy and protecting consumer.
The Glass-Steagall Act of 1933
The Glass-Steagall ActGlass-Steagall Act
The Banking Act of 1933, , was a law that established the Federal Deposit Insurance Corporation in the United States and introduced banking reforms, some of which were designed to control speculation. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Senator...
of 1933 placed a "wall of separation" between banks and brokerages, which was largely repealed by the Financial Services Modernization Act of 1999. Though some commentators regard the restoration of the 1933 bill as crucial, even calling it "the most vital element of Wall Street reform", House Democratic leaders refused to allow an amendment by Rep. Maurice Hinchey
Maurice Hinchey
Maurice Dunlea Hinchey , is the U.S. Representative for , serving since 1993. He is a member of the Democratic Party...
(D-NY) to restore Glass-Steagall as part of the 2009 Frank bill. Hinchey introduced his proposal as a separate bill, the Glass-Steagall Restoration Act of 2009. Nonetheless, the "Volcker rule" proposed by the Obama administration has been described as a "new Glass-Steagall Act for the 21st century", as it establishes stringent rules against banks using their own money to make risky investments.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley ActSarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
, by Sen. Paul S. Sarbanes (D-MD
Maryland
Maryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
) and Rep. Michael G. Oxley (R
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
-OH
Ohio
Ohio is a Midwestern state in the United States. The 34th largest state by area in the U.S.,it is the 7th‑most populous with over 11.5 million residents, containing several major American cities and seven metropolitan areas with populations of 500,000 or more.The state's capital is Columbus...
), was signed into law by George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
in July 2002. The bill was enacted as a reaction to a number of major corporate and accounting scandals
Accounting scandals
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...
including those affecting Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
and WorldCom.
2009 and 2010 reform
As of May 2010, both the House and Senate bills had been passed, but the differences between the bills were to be worked out in United States congressional conference committee. Differences which must be resolved include: whether the new consumer protection agency would be independent (Senate) or part of the Federal Reserve; whether to require banks to issue credit derivatives in separately capitalized affiliateSubsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
s (Senate); how exactly the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) will wind down or bail out large institutions which fail; the circumstances under which large institutions could be broken up; a 15 to 1 leverage limit in the House bill; the terms of a Fed audit (continuous as in the House bill or one-time as in the Senate bill); both bills include the Volcker rule which prohibits proprietary trading
Proprietary trading
Proprietary trading occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, with the firm's own money as opposed to its customers' money, so as to make a profit for itself...
by bank holding companies, but both have a caveat which allow for regulators to overrule the rule; both bills propose to regulate credit rating agencies, but the Senate's bill is much stronger.
House bill
H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009 by Rep. Barney FrankBarney Frank
Barney Frank is the U.S. Representative for . A member of the Democratic Party, he is the former chairman of the House Financial Services Committee and is considered the most prominent gay politician in the United States.Born and raised in New Jersey, Frank graduated from Harvard College and...
(D-MA
Massachusetts
The Commonwealth of Massachusetts is a state in the New England region of the northeastern United States of America. It is bordered by Rhode Island and Connecticut to the south, New York to the west, and Vermont and New Hampshire to the north; at its east lies the Atlantic Ocean. As of the 2010...
), passed by the House of Representatives in December 2009, and awaiting action by the Senate as of April 2010.
Senate bill
S.3217 was introduced by Senate Banking Committee chairman Chris Dodd (D-CTConnecticut
Connecticut is a state in the New England region of the northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, and the state of New York to the west and the south .Connecticut is named for the Connecticut River, the major U.S. river that approximately...
) on April 15, 2010. Dodd's bill included a $50 billion liquidation fund which drew criticism as a continuing bailout, which he was pressured to remove by Republicans and the Obama administration. The Senate bill passed on May 20, 2010.
Volcker Rule
The "Volcker Rule" was proposed by President Barack ObamaBarack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
based on advice by Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
, and a draft of the proposed legislation was prepared by the U.S. Treasury Department. It limited any one bank from holding more than 10% of FDIC-insured deposits, and prohibited any bank with a division holding such deposits from using its own capital to make speculative investments. The Volcker rule faced heavy resistance in the Senate and was introduced as part of the subsequent Dodd bill only in a limited form.
Financial Stability Oversight Council
Chaired by the United States Secretary of the TreasuryUnited States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
, a new multi-authority oversight body called the Financial Stability Oversight Council of regulators will be established. The council will consist of nine members including regulators from the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, U.S. Securities and Exchange Commission, Federal Housing Finance Agency
Federal Housing Finance Agency
The Federal Housing Finance Agency is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the Federal Housing Finance Board , the Office of Federal Housing Enterprise Oversight , and the U.S...
, and many other agencies. The main purpose of the council is to identify risk in the Financial system
Financial system
In finance, the financial system is the system that allows the transfer of money between savers and borrowers. A financial system can operate on a global, regional or firm specific level...
. Also, the council will look at the interconnectivity of the highly leveraged financial firms and can ask companies to divest holdings if their structure poses a great threat to the Financial system. The council will have a solid control on the operations of the leveraged firms and also help in increasing the transparency.