Debate on Financial Reform Blocked by Senate Republicans

After the financial meltdown was blamed for a major part on unregulated derivatives and credit default swaps (CDS), the Democrats are pushing to pass the financial reform bill that will bring in more regulation of the financial industry. But this has become a case of easier said than done as the Republicans are firmly opposed to the bill and have blocked it from being brought on the Senate floor for debate. Senate Republicans want to add significant changes to the bill and question Democrats’ tough regulations for financial institutions. [Read more…]

Financial Reform Proposals Draw Mixed Reactions

Even as President Obama’s financial reform looks all set to make a place for itself in the economic fabric of the country, critics within political circles say that these changes will still not address the risks posed by “too big to fail” institutions. [Read more…]

No Consensus on Financial Reform

After the health care reform, the next major item on the agenda of the Obama administration is reforming the financial system. With the catastrophic events of the last two years fresh in the memory, no one can disagree on how important it is to make the financial system more robust and avoid future crises. [Read more…]

Revised Financial Reform Legislation Made Public

Senator Chris Dodd, Chairman of the Senate Banking Committee, has released a revised version of the financial reform legislation that intends to prevent another financial crisis. The bill has been redrafted after consultations with several Republicans and Democrats who had rejected the first draft.

The revised bill has incorporated many of the suggestions made by the Republicans, which critics argue would make the legislation ineffective. However, despite the changes, the Republicans have once again opposed the bill.

The key proposals of the bill are:

Consumer Protection Agency

The biggest change that Dodd has proposed is that there should be a consumer protection agency to prevent banks from exploiting customers. This is in response to the subprime crisis where lenders extended a huge number of risky loans that brought the whole financial industry close to a collapse. Many economists were demanding an independent agency to look after the interests of the consumers, but Dodd has agreed to Republican objections and has suggested creation of an agency under the Fed umbrella.

Regulation of Credit Rating Agencies

Credit rating agencies like Moody’s had come for severe criticism after they incorrectly assessed the risk on mortgage backed securities, which crashed in value once the housing prices fell. The bill proposes that these agencies should now be made responsible for their actions and they should be regulated by the SEC to prevent similar errors in future.

Limits on Trading Activities of Banks

The bill has also given a nod to the Volcker Rule, which will restrict proprietary trading of banks. Currently banks can invest the depositors’ money in risky hedge fund trades. Such trades brought many of the Wall Street banks close to bankruptcy as the financial crisis unfolded. Regulation has also been proposed on derivatives trading by banks.

Financial Stability Oversight Council

The council’s job would be to identify risks in the overall financial system so that they can be dealt with before they result in a large scale crisis. However, once again the Fed has been given most of the duties, while the council will only sign off on decisions.

The bill looks like a compromise formula, and it will certainly face a lot of opposition from both pro-reform and anti-reform camps. Another problem is that even if it is passed, the success of the legislation will not be tested until the economy faces another crisis, and at that stage it will be too late to make any changes.

Financial Reform Could Include Legislation on Financial Planners

If a proposal from Democrat Senator Herb Kohl finds its way into the financial reform bill, and if that bill is passed, the financial planning profession could soon be regulated.

Currently there are no restrictions or laws governing people who call themselves financial planners. This is in stark contrast to other financial professions. For example, an investment adviser has to be registered with the SEC, and an insurance agent needs a license to sell insurance policies. There are many laws that govern what these professionals can and cannot do when selling their products or when providing a particular service. [Read more…]