White House officials claim the new law will prevent another economic collapse similar to the one in 2008 that led to the failure of Lehman Brothers and Washington Mutual, and the creation of a $700 billion government fund to bail out American International Group, Citigroup, and other financial institutions.
The 2,300-page legislation, which the Senate passed July 15 and the House of Representatives two weeks earlier, sets up a Financial Stability Oversight Council to determine risks to the capitalist financial system.
It establishes a consumer bureau within the Federal Reserve, replacing the Office of Thrift Supervision. The new bureau will be staffed mostly by banking regulators transferred from other government-run consumer divisions.
The bill calls for shifting the trading of some derivatives, which worldwide now encompass more than $600 trillion, from private over-the-counter sales to public clearinghouses. Derivatives are basically bets placed on the rise or decline in the price of stocks, bonds, or other paper values.
The bill also seeks to restrict financial firms from trading funds from their own accounts. It assigns a slew of regulators from 10 government agencies to write hundreds of new rules to implement the law. The Commodity Futures Trading Commission, which will have new authority over derivatives, for example, has already asked for $45 million for its new staff.
The Federal Reserve now becomes the pre-eminent regulator, stated the Wall Street Journal, warning that the risks are that it still wont be able to prevent another crisis. The governments central bank will continue to have authority to bail out financial institutions the government considers too big to fail. The new clearinghouses will also have access to discounted Federal Reserve funds.
Some of the biggest banks have grown even bigger since the governments 2008 bailout. Before the crisis the 25 largest had 56% of bank assets; today, its 59%, the Journal reported.
President Barack Obama claims the new law, which his administration campaigned to pass, will lay the foundation for a stronger and safer financial system that will be less prone to panic and collapse.
There is little in this legislation that will fundamentally change the way Wall Street does business, Dean Baker, codirector of the Center for Economic and Policy Research in Washington, D.C., told Bloomberg News, in presenting a dimmer view. The six largest banks will still enjoy the enormous implicit subsidy that results from the expectation that the federal government will bail them out in the event of a crisis.
Banks take advantage of regulations
Some of the largest banks are adopting plans to take advantage of new regulations to maximize their profits. Compelled to trade derivatives in the daylight of closely regulated clearinghouses, stated the New York Times, banks like JP Morgan Chase and Goldman Sachs are building up their derivatives brokerage operations. Their goal is to make up any lost profitsand perhaps make even more money than before.
Working people, meanwhile, will be hard hit by many of the changes as banks plan to pass on additional costs to their customers, with increased fees on bank accounts and credit cards. The financial reform law will make it more difficult for working people to borrow money. It requires banks to more closely scrutinize an individuals income, credit history, and job status before making a loan.
While the law supposedly makes permanent that individual deposits of up to $250,000 are insured, the increased pace of bank failures raises questions about how secure deposits will be. Ninety banks have collapsed through mid-July, a faster pace than in 2009 when 140 banks failed. These mounting bank closures have led to a Federal Deposit Insurance Corporation deficit of more than $20 billion.
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