Skip to main content

U.S. lawmakers approved a mammoth overhaul of the financial system, marking the end to an era of hands-off regulation and the start of a bid to forestall future crises.

The reform package overcame a final hurdle Thursday when the Senate passed it in a tight vote largely on partisan lines. President Barack Obama is expected to sign the landmark bill into law at a ceremony next week.

The Senate vote caps more than a year of legislative wrangling and intense lobbying, culminating in a 2,300-page bill that does more to reshape the financial industry than any measure since the Great Depression.

"The American public expects nothing less of us than to fashion proposals that will minimize great risks to them," said Senator Christopher Dodd, a Democrat and a principal architect of the legislation.

"They know we have not solved every problem and that we are not going to bring back their homes and their jobs; but they expect us to respond to the situation that brought us to the brink of financial disaster. This is our best effort to do so."

In a sign of the partisan chasm in Washington ahead of November's midterm elections, only three Republican senators crossed party lines on Thursday to allow the legislation to move forward, by a vote of 60 to 39. Other Republicans decried the bill, describing it as a "legislative monster" that will increase bureaucracy and prolong uncertainty in the financial industry. One Democrat voted against it, saying it did not go far enough.

Whether the legislation is sufficient to head off future financial disaster is a subject of fierce debate. The bill gives regulators critical tools they lacked in 2008, including the ability to seize sinking financial institutions and require them to spin off holdings that threaten the overall system. A vast swath of financial markets, previously beyond the grasp of regulators, will be subject to supervision. And a powerful new agency will protect consumers in transactions from mortgages to credit cards.

Cat:e528746c-3414-401a-b14b-50247e3bdf01Forum:d0fa4e14-88d2-41f9-8a19-896bdff9544b

Banks will no longer be the freewheeling, money machines that they were in the years leading up to the crisis, experts say. The new law curtails some types of trading and tightens capital requirements.

"It's an industry that will be less profitable, an industry that will have less risk," said Fred Cannon, co-head of research at Keefe, Bruyette & Woods Inc., at an industry conference in Manhattan on Thursday.

Still, for Wall Street, it could have been far worse. No mega-bank will be broken into smaller pieces, a measure pushed by some economists to prevent any institution from being too big to fail. The wall that once existed between commercial banking and the trading of securities, erected in the aftermath of the Great Depression and demolished in 2000, will not be rebuilt.

The legislation places considerable trust in the wisdom of regulators, who are granted significant new powers. In the coming months, they will write scores of new rules to guide the functioning of the financial system.

The U.S. Treasury has already initiated a "rigorous" planning process in an effort to swiftly implement reforms, a senior official said Thursday.

"That work cannot be done overnight. It will take time," said Neil Wolin, deputy secretary of the Treasury. "But we are prepared to move on to the next stage with speed."

That stage involves rolling out hundreds of new regulations over the next two or three years, a process that will be subject to intense lobbying. The legislation is "only the first leg of the marathon," said Tom Quaadman of the U.S. Chamber of Commerce, which lobbied hard against key aspects of the bill. "We're going to be involved in this fight for the long haul."

In one key measure, the legislation will create a new council - a kind of super regulator - tasked with monitoring threats and protecting the financial system from another apocalypse. Its nine members will include representatives from the Federal Reserve, the Securities and Exchange Commission, the Treasury Department, and other agencies.

Some experts worry that sharing the responsibility across different agencies, rather than having it centralized in one, could spell trouble - a situation where "nine people are looking at each other around a table and wondering who dropped the ball," said Darrell Duffie, a finance professor at Stanford University.

Legislators appeared to acknowledge Thursday that the law will only be as good as its implementation. "We can't legislate wisdom or passion. We can't legislate competency," Mr. Dodd said. "All we can do is create the structures and hope that good people will be appointed who will attract other good people."



Key changes



Here are some of the changes under new legislation to overhaul the U.S. financial system:



REGULATORS



Office of Thrift Supervision closes and its authority is transferred to the Comptroller of the Currency.



The heads of all the major financial regulators and the Treasury secretary will form the Financial Stability Oversight Council to monitor risk in the financial system.



FINANCIAL INSTITUTIONS



Banks with more than $15-billion (U.S.) in assets will have to get rid of their trust preferred securities from their Tier 1 capital.



Every financial institution with more than $10-billion (U.S.) in assets must perform annual stress tests.



CREDIT RATING AGENCIES



Investors will be allowed to sue credit rating agencies such as Moody's and Standard & Poor's if they "recklessly" failed to review information in developing a rating.



CONSUMERS



A new regulator will be established, absorbing all consumer protection functions under the Federal Reserve, Federal Deposit Insurance Corp. and Federal Trade Commission.



Reuters

Interact with The Globe