WASHINGTON (CN) – The House voted 223-202 Friday to pass sweeping financial reform legislation that would give the government new powers to regulate Wall Street by creating an agency to oversee mortgage and credit card deals and by allowing the government to shut down failing firms.
“The crisis from which we are still recovering was born not only of failure on Wall Street, but also in Washington,” said President Barack Obama. “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.”
The bill is Congress’s strongest response yet to the recession that began at the end of 2007 and embodies the Obama administration’s call for a financial regulatory overhaul.
Senators are considering a similar bill, with debate on it expected early next year.
During House debate, Republicans spoke out against the bill, claiming it would tighten credit, result in fewer jobs, and define a too-big-to-fail firm, granting it an implicit government guarantee.
Democrats maintained that the legislation addresses the regulatory shortfalls responsible for the recent financial crisis, and argued that it would decrease, not increase, the risk of taxpayer-funded bailouts.
The legislation would set up an independent Consumer Financial Protection Agency to oversee mortgages, credit cards, and other financial products, extend bank oversight to cover other financial institutions, and give regulators the authority to break up large firms they consider threatening to the financial market.
It would require companies to keep larger financial reserves as they increase in size, and it would set up a fund that financial institutions with more than $10 billion in assets pay into to support the shutting down of faulty firms.
When a large institution fails, creditors and shareholders would be the first to bear the costs, and if this isn’t enough, the fund would kick in.
To oversee the risky firms, the bill would create a council to monitor the institutions and outlines how to slowly close larger firms down if they are considered to be a danger to the rest of the financial system.
The method of winding down a failing “too big to fail” company would be unique from filing for bankruptcy. In this case, regulators would take into consideration the institution’s connection to other financial firms
Past legislation regulated banks, but in many ways, allowed financial firms, like American International Group, to roam free even when they operated like banks. The new legislation now extends government regulation to these financial institutions and for the first time, regulates the roughly $592 trillion derivatives market.
Timothy Geithner has said the secrecy of derivatives played a major role in the economic crisis and prevented the government from realizing the extent of the catastrophe.
A derivative is a financial contract that transfers to another party the risk that an asset’s price will change. In the case of American International Group, the company had sold protection against investment risks without adequate capital to back up its commitments, resulting in a $180 billion government bailout.