House Approves Sweeping Reform To Financial Regulation

The House passed a bill that would make sweeping changes to financial regulation if passed into law. The significant elements of the current bill include an oversight council …

The House passed a bill that would make sweeping changes to financial regulation if passed into law. The significant elements of the current bill include an oversight council to track systemic risk, and establishment of government authority to dismantle firms it deems a threat to the financial system and economy. For more on this, see the following article from The Street.

The House passed a sweeping financial-services reform bill Friday, which — although diluted somewhat from the initial plan introduced by the White House earlier this year — constitutes the nation’s first major legislative response to the banking crisis that sparked the worst economic downturn since the Great Depression.

The bill, which passed along party lines (223-202) and will now advance to the Senate, covers everything from consumer protections, to governmental authority to dismantle banking behemoths during times of crisis, to heightened oversight of the trading of complex financial derivatives and the activities of hedge funds.

“The crisis from which we are still recovering was born not only of failure on Wall Street, but also in Washington,” President Obama said. “We have a responsibility to learn from it and to put in place reforms that will promote sound investment, encourage real competition and innovation and prevent such a crisis from ever happening again. ”

One of the most significant elements of the bill is the formation of a Financial Services Oversight Council — comprised of the Treasury secretary, the Federal Reserve chairman and the chiefs of regulatory agencies — designed to track the financial markets for systemic risks.

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If the bill becomes law, the government could take apart any firm that it believes poses a dangerous enough threat to the banking system and the economy. Firms with assets of more than $50 billion, and hedge funds with at least $10 billion in assets, would contribute to a $150 billion pool that would cover the costs of disassembling such a company.

Also in Washington Friday, the Obama administration’s pay czar, Kenneth Feinberg, handed down his edict on the executive compensation packages of those companies that took the most bailout money, including Citigroup(C Quote), AIG(AIG Quote) and the failed auto companies. The plan calls for pay restrictions on the 25th to the 100th highest paid employees at those concerns, according to Feinberg.

Back in New York, there’s been no official word yet on whether Citigroup has formulated a TARP exit strategy that would receive the federal government’s imprimatur, but rumors and leaked information have been swirling all week that, with talks ongoing, Citigroup wants to raise as much as $20 billion in a stock offering.

The rumor mill kept churning Friday, and the megabank’s shares were among the few financial names in the green Friday afternoon. Its stock ended trading Friday at $3.95, up 2.1%.

The rage among megabanks for getting out from under TARP has in large part been motivated by a desire to leave the pay czar’s gaze.

Bank of America(BAC Quote), of course, already freed itself from TARP this week, and Wells Fargo(WFC Quote) had apparently been biding its time.

But rumblings cropped up Friday afternoon that Wells Fargo has been testing the waters for possible public offerings of stock, according to CNBC; the bank took $25 billion from TARP and $5 billion from Prudential amid the financial crisis, when it subsumed Wachovia.

A day earlier, Goldman Sachs(GS Quote) said it would spike the cash bonuses of its top management this year, bowing to shareholder pressure. Last month, a slew of AIG execs threatened to resign if their pay was cut, and word emerged Friday that the infamous insurer’s general counsel, Anastasia Kelly, would be doing just that, the New York Times reported.

Meanwhile Friday, at a Congressional hearing on Capitol Hill, the Securities and Exchange Commission’s enforcement director vowed to pursue charges against Bank of America, stemming from the bonuses paid to Merrill Lynch executives when it acquired the firm in last year’s crisis-induced shot-gun deal.

This article has been republished from The Street. You can also view this article at
The Street, an investment news and analysis site.

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